11/29/2017

CHAPTER 6

SPREADSHEET MODELS

2

Introduction

u

Spreadsheet models are mathematical and logic-based

models

u

Referred to as what-if models

u

Provide easy-to-use,

logical functions

sophisticated

mathematical

and

u

Allow for easy instantaneous recalculation for a change in

model inputs

u

Are less expensive

u

Often come preloaded on computers

u

Are fairly easy to use

u

The most used business analytics tool

1

11/29/2017

Building Good

Spreadsheet Models

INFLUENCE DIAGRAMS

BUILDING A MATHEMATICAL MODEL

SPREADSHEET DESIGN AND IMPLEMENTING THE MODEL IN A SPREADSHEET

Building Good Spreadsheet

Models

u

u

4

Total cost of manufacturing a product is the sum of two

costs:

u

Fixed cost: Portion of the total cost that does not depend on the

production quantity and remains the same no matter how much

is produced

u

Variable cost: Portion of the total cost that is dependent on and

varies with the production quantity

Make-versus-buy decision: comparing the costs of

manufacturing in-house to the costs of outsourcing

production to another firm

2

11/29/2017

Building Good Spreadsheet

Models

5

•

Example:

•

Nowlin Plastics produces a line of cell phone covers.

Nowlin’s best-selling cover is its Viper model, a slim but

very durable black and gray plastic cover. The annual

fixed cost for the Viper cover is $234,000.

•

This fixed cost includes management time, advertising,

and other costs that are incurred regardless of the

number of units eventually produced.

•

In addition, the total variable cost, including labor and

material costs, is $2 for each unit produced.

Building Good Spreadsheet

Models

6

Influence Diagrams

u

An influence diagram is a visual representation

that shows which entities influence others in a

model

u

Parts of the model are represented by circular or

oval symbols called nodes, and arrows

connecting the nodes show influence

3

11/29/2017

Figure 6.1: An Influence Diagram

for Nowlin’s Manufacturing Cost

7

Figure 6.2: An Influence Diagram for

8

Comparing

Manufacturing

Versus

Outsourcing Cost for Nowlin Plastics

4

11/29/2017

Building Good Spreadsheet

Models

9

Building a Mathematical Model

u

Consider the cost of manufacturing the required units of

the Viper

u

As the influence diagram shows, this cost is a function of

the fixed cost, the variable cost per unit, and the

quantity required

u

Define notation for every node in the influence diagram:

u

q = quantity (number of units) required

u

FC = the fixed cost of manufacturing

u

VC = the per-unit variable cost of manufacturing

u

TMC(q) = total cost to manufacture q units

Building Good Spreadsheet

Models

u

u

u

10

The cost-volume model for producing q units is

TMC(q) = FC + (VC × q)

For the Viper, FC = $234,000 and VC = $2, so

TMC(q) = $234,000 + $2q

Mathematical model for purchasing q units is

TPC(q) = Pq

P = the per unit purchase cost

TPC(q) = the total cost to outsource or purchase q units

u

For the Viper, since P = $3.50, TPC(q) = 3.5q

5

11/29/2017

Building Good Spreadsheet

Models

11

u

Mathematical model for the savings associated

with outsourcing

S(q) = TMC(q) – TPC(q)

S(q) = the savings due to outsourcing

u

Nowlin has to decide, “For what quantities is it

more cost-effective to outsource rather than

produce the Viper?”

u

Mathematically, this question is, “For what values

of q is S(q) > 0?”

Building Good Spreadsheet

Models

12

Spreadsheet Design and Implementing the Model in a

Spreadsheet

u

For the Nowlin Plastics problem, we have defined the

following components:

q, FC, VC, TMC(q), P, TPC(q), S(q)

u

TMC, TPC, and S are the functions of other components,

whereas q, FC, VC, and P are not

u

TMC, TPC, and S will be formulas involving other cells in

the spreadsheet model, whereas q, FC, VC, and P will just

be entries in the spreadsheet

6

11/29/2017

Building Good Spreadsheet

Models

13

u

The number of Vipers to make or buy for next year is

really a decision Nowlin gets to make, hence we refer

to quantity q as a decision variable

u

FC, VC, and P are measurable factors that define

characteristics of the process we are modelling, hence

we refer to FC, VC, and P as parameters

Figure 6.3: Nowlin Plastics Make14

Versus-Buy Spreadsheet Model

7

11/29/2017

Building Good Spreadsheet

Models

u

15

The general principles of spreadsheet model design and

construction are:

u

Separate the parameters from the model: This enables

the user to update the model parameters without the

risk of mistakenly creating an error in a formula

u

Document the model and use proper formatting and

color as needed: A good spreadsheet model is well

documented. Clear labels and proper formatting and

alignment facilitate navigation and understanding

u

Use simple formulas: Clear, simple formulas can

reduce errors and make maintaining the spreadsheet

easier. Long and complex calculations should be

divided into several cells

What-If Analysis

DATA TABLES

GOAL SEEK

8

11/29/2017

What-If Analysis

17

Data Tables

u

Data Table: Excel tool which quantifies the

impact of changing the value of a specific

input on an output of interest

u

One-way data table: summarizes a single

input’s impact on the output

u

Two-way data table: summarizes two inputs’

impact on the output

Figure 6.4: The Input for Constructing

18 a

One-Way Data Table for Nowlin Plastics

9

11/29/2017

Figure 6.5 Results of One-Way

19

Data Table for Nowlin Plastics

Figure 6.6: The Input for Constructing 20

a

Two-Way Data Table for Nowlin Plastics

10

11/29/2017

21

Figure 6.7: Results of Two-Way Data

Table for Nowlin Plastics

What-If Analysis

22

Goal Seek

u

Goal Seek: Excel tool that allows the user to

determine the value of an input cell that will

cause the value of a related output cell to

equal some specified value (the goal)

u

In the case of Nowlin Plastics, suppose we

want to know the value of the quantity of

Vipers where it becomes more cost effective

to manufacture rather than outsource

11

11/29/2017

Figure 6.8: Goal Seek Dialog Box

23

for Nowlin Plastics

Figure 6.9: Results from Goal Seek for 24

Nowlin Plastics

12

11/29/2017

Some Useful Excel

Functions for Modeling

SUM AND SUMPRODUCT

IF AND COUNTIF

VLOOKUP

Some Useful Excel Functions for Modeling26

SUM and SUMPRODUCT

u

SUM: Function that adds up all of the numbers in a range of cells

u

SUMPRODUCT: Function that returns the sum of the products of

elements in a set of arrays

13

11/29/2017

Figure 6.10: What-If Model for

Foster Generators

27

28

Some Useful Excel Functions for Modeling

IF and COUNTIF

u

=IF(condition, result if condition is true, result if condition is false)

u

=COUNTIF(range, condition)

u

Counts the number of components having a positive order

quantity

Illustration:

u

Gambrell Manufacturing produces car stereos

u

Gambrell likes to keep its components inventory to a minimum

u

Hence, it uses an inventory policy known as an order-up-to

policy

u

Order-up-to policy: Whenever the inventory on hand drops

below a certain level, enough units are ordered to return the

inventory to that predetermined level

14

11/29/2017

29

Figure 6.11: Gambrell Manufacturing

Component Ordering Model

30

Some Useful Excel Functions for Modeling

VLOOKUP

u This function allows the user to pull a subset of data

from a larger table of data based on some criterion

u General form =VLOOKUP(value, table, index, range)

where,

value = the value to search for in the first column

of the table

table = the cell range containing the table

index = the column in the table containing the

value to be returned

range = TRUE if looking for the first approximate

match of value and FALSE if looking for an

exact match of value

15

11/29/2017

31

Figure 6.12: Granite Insurance Bonus Model

Auditing Spreadsheet

Models

TRACE PRECEDENTS AND DEPENDENTS

SHOW FORMULAS

EVALUATE FORMULAS

ERROR CHECKING

WATCH WINDOW

16

11/29/2017

Auditing Spreadsheet Models

33

u

Excel contains a variety of tools to assist you in the

development and debugging of spreadsheet models

u

These tools are found in the Formula Auditing group of the

Formulas tab

Auditing Spreadsheet Models

34

Trace Precedents and Dependents

u Trace Precedents button: After selecting cells, this button

creates arrows pointing to the selected cell from cells that

are part of the formula in that cell

u Trace Dependents button: Shows arrows pointing from the

selected cell to cells that depend on the selected cell

u Both of the tools are excellent for quickly ascertaining how

parts of a model are linked

17

11/29/2017

Figure 6.13: The Formula Auditing Group

Figure 6.14: Trace Precedents for Foster 36

Generator

18

11/29/2017

Figure 6.15: Trace Dependents for37

the Foster Generators Model

Auditing Spreadsheet Models

38

Show Formulas

u

To see the formulas in a worksheet, simply click on any cell

in the worksheet and then click on Show Formulas—you will

see the formulas residing in that worksheet

u

To revert to hiding the formulas, click again on the Show

Formulas button

19

11/29/2017

Auditing Spreadsheet Models

39

Evaluate Formulas

u

The Evaluate Formulas button allows you to

investigate the calculations of a cell in great

detail

u

Provides an excellent means of identifying the

exact location of an error in a formula

Figure 6.16: The Evaluate Formula Dialog

Box for Gambrell Manufacturing

20

11/29/2017

Figure 6.17: The Evaluate Formula Dialog

41

Box for Gambrell Manufacturing Cell B17

after Four Clicks of the Evaluate Button

Auditing Spreadsheet Models

42

Error Checking

u

The Error Checking button provides an automatic

means of checking for mathematical errors within

formulas of a worksheet

u

Clicking on the Error Checking button causes

Excel to check every formula in the sheet for

calculation errors

u

If an error is found, the Error Checking dialog box

appears

21

11/29/2017

Figure 6.18: The Error Checking Dialog 43

Box for a Division by Zero Error

Auditing Spreadsheet Models

44

Watch Window

u

The Watch Window, located in the Formula

Auditing group, allows the user to observe the

values of cells included in the Watch Window box

list

u

Useful for large models when not all of the model

is observable on the screen or when multiple

worksheets are used

22

11/29/2017

Figure 6.19: The Watch Window for Cell

45

B17 of the Gambrell Manufacturing

Model

23

CHAPTER 6

SPREADSHEET MODELS

2

Introduction

u

Spreadsheet models are mathematical and logic-based

models

u

Referred to as what-if models

u

Provide easy-to-use,

logical functions

sophisticated

mathematical

and

u

Allow for easy instantaneous recalculation for a change in

model inputs

u

Are less expensive

u

Often come preloaded on computers

u

Are fairly easy to use

u

The most used business analytics tool

1

11/29/2017

Building Good

Spreadsheet Models

INFLUENCE DIAGRAMS

BUILDING A MATHEMATICAL MODEL

SPREADSHEET DESIGN AND IMPLEMENTING THE MODEL IN A SPREADSHEET

Building Good Spreadsheet

Models

u

u

4

Total cost of manufacturing a product is the sum of two

costs:

u

Fixed cost: Portion of the total cost that does not depend on the

production quantity and remains the same no matter how much

is produced

u

Variable cost: Portion of the total cost that is dependent on and

varies with the production quantity

Make-versus-buy decision: comparing the costs of

manufacturing in-house to the costs of outsourcing

production to another firm

2

11/29/2017

Building Good Spreadsheet

Models

5

•

Example:

•

Nowlin Plastics produces a line of cell phone covers.

Nowlin’s best-selling cover is its Viper model, a slim but

very durable black and gray plastic cover. The annual

fixed cost for the Viper cover is $234,000.

•

This fixed cost includes management time, advertising,

and other costs that are incurred regardless of the

number of units eventually produced.

•

In addition, the total variable cost, including labor and

material costs, is $2 for each unit produced.

Building Good Spreadsheet

Models

6

Influence Diagrams

u

An influence diagram is a visual representation

that shows which entities influence others in a

model

u

Parts of the model are represented by circular or

oval symbols called nodes, and arrows

connecting the nodes show influence

3

11/29/2017

Figure 6.1: An Influence Diagram

for Nowlin’s Manufacturing Cost

7

Figure 6.2: An Influence Diagram for

8

Comparing

Manufacturing

Versus

Outsourcing Cost for Nowlin Plastics

4

11/29/2017

Building Good Spreadsheet

Models

9

Building a Mathematical Model

u

Consider the cost of manufacturing the required units of

the Viper

u

As the influence diagram shows, this cost is a function of

the fixed cost, the variable cost per unit, and the

quantity required

u

Define notation for every node in the influence diagram:

u

q = quantity (number of units) required

u

FC = the fixed cost of manufacturing

u

VC = the per-unit variable cost of manufacturing

u

TMC(q) = total cost to manufacture q units

Building Good Spreadsheet

Models

u

u

u

10

The cost-volume model for producing q units is

TMC(q) = FC + (VC × q)

For the Viper, FC = $234,000 and VC = $2, so

TMC(q) = $234,000 + $2q

Mathematical model for purchasing q units is

TPC(q) = Pq

P = the per unit purchase cost

TPC(q) = the total cost to outsource or purchase q units

u

For the Viper, since P = $3.50, TPC(q) = 3.5q

5

11/29/2017

Building Good Spreadsheet

Models

11

u

Mathematical model for the savings associated

with outsourcing

S(q) = TMC(q) – TPC(q)

S(q) = the savings due to outsourcing

u

Nowlin has to decide, “For what quantities is it

more cost-effective to outsource rather than

produce the Viper?”

u

Mathematically, this question is, “For what values

of q is S(q) > 0?”

Building Good Spreadsheet

Models

12

Spreadsheet Design and Implementing the Model in a

Spreadsheet

u

For the Nowlin Plastics problem, we have defined the

following components:

q, FC, VC, TMC(q), P, TPC(q), S(q)

u

TMC, TPC, and S are the functions of other components,

whereas q, FC, VC, and P are not

u

TMC, TPC, and S will be formulas involving other cells in

the spreadsheet model, whereas q, FC, VC, and P will just

be entries in the spreadsheet

6

11/29/2017

Building Good Spreadsheet

Models

13

u

The number of Vipers to make or buy for next year is

really a decision Nowlin gets to make, hence we refer

to quantity q as a decision variable

u

FC, VC, and P are measurable factors that define

characteristics of the process we are modelling, hence

we refer to FC, VC, and P as parameters

Figure 6.3: Nowlin Plastics Make14

Versus-Buy Spreadsheet Model

7

11/29/2017

Building Good Spreadsheet

Models

u

15

The general principles of spreadsheet model design and

construction are:

u

Separate the parameters from the model: This enables

the user to update the model parameters without the

risk of mistakenly creating an error in a formula

u

Document the model and use proper formatting and

color as needed: A good spreadsheet model is well

documented. Clear labels and proper formatting and

alignment facilitate navigation and understanding

u

Use simple formulas: Clear, simple formulas can

reduce errors and make maintaining the spreadsheet

easier. Long and complex calculations should be

divided into several cells

What-If Analysis

DATA TABLES

GOAL SEEK

8

11/29/2017

What-If Analysis

17

Data Tables

u

Data Table: Excel tool which quantifies the

impact of changing the value of a specific

input on an output of interest

u

One-way data table: summarizes a single

input’s impact on the output

u

Two-way data table: summarizes two inputs’

impact on the output

Figure 6.4: The Input for Constructing

18 a

One-Way Data Table for Nowlin Plastics

9

11/29/2017

Figure 6.5 Results of One-Way

19

Data Table for Nowlin Plastics

Figure 6.6: The Input for Constructing 20

a

Two-Way Data Table for Nowlin Plastics

10

11/29/2017

21

Figure 6.7: Results of Two-Way Data

Table for Nowlin Plastics

What-If Analysis

22

Goal Seek

u

Goal Seek: Excel tool that allows the user to

determine the value of an input cell that will

cause the value of a related output cell to

equal some specified value (the goal)

u

In the case of Nowlin Plastics, suppose we

want to know the value of the quantity of

Vipers where it becomes more cost effective

to manufacture rather than outsource

11

11/29/2017

Figure 6.8: Goal Seek Dialog Box

23

for Nowlin Plastics

Figure 6.9: Results from Goal Seek for 24

Nowlin Plastics

12

11/29/2017

Some Useful Excel

Functions for Modeling

SUM AND SUMPRODUCT

IF AND COUNTIF

VLOOKUP

Some Useful Excel Functions for Modeling26

SUM and SUMPRODUCT

u

SUM: Function that adds up all of the numbers in a range of cells

u

SUMPRODUCT: Function that returns the sum of the products of

elements in a set of arrays

13

11/29/2017

Figure 6.10: What-If Model for

Foster Generators

27

28

Some Useful Excel Functions for Modeling

IF and COUNTIF

u

=IF(condition, result if condition is true, result if condition is false)

u

=COUNTIF(range, condition)

u

Counts the number of components having a positive order

quantity

Illustration:

u

Gambrell Manufacturing produces car stereos

u

Gambrell likes to keep its components inventory to a minimum

u

Hence, it uses an inventory policy known as an order-up-to

policy

u

Order-up-to policy: Whenever the inventory on hand drops

below a certain level, enough units are ordered to return the

inventory to that predetermined level

14

11/29/2017

29

Figure 6.11: Gambrell Manufacturing

Component Ordering Model

30

Some Useful Excel Functions for Modeling

VLOOKUP

u This function allows the user to pull a subset of data

from a larger table of data based on some criterion

u General form =VLOOKUP(value, table, index, range)

where,

value = the value to search for in the first column

of the table

table = the cell range containing the table

index = the column in the table containing the

value to be returned

range = TRUE if looking for the first approximate

match of value and FALSE if looking for an

exact match of value

15

11/29/2017

31

Figure 6.12: Granite Insurance Bonus Model

Auditing Spreadsheet

Models

TRACE PRECEDENTS AND DEPENDENTS

SHOW FORMULAS

EVALUATE FORMULAS

ERROR CHECKING

WATCH WINDOW

16

11/29/2017

Auditing Spreadsheet Models

33

u

Excel contains a variety of tools to assist you in the

development and debugging of spreadsheet models

u

These tools are found in the Formula Auditing group of the

Formulas tab

Auditing Spreadsheet Models

34

Trace Precedents and Dependents

u Trace Precedents button: After selecting cells, this button

creates arrows pointing to the selected cell from cells that

are part of the formula in that cell

u Trace Dependents button: Shows arrows pointing from the

selected cell to cells that depend on the selected cell

u Both of the tools are excellent for quickly ascertaining how

parts of a model are linked

17

11/29/2017

Figure 6.13: The Formula Auditing Group

Figure 6.14: Trace Precedents for Foster 36

Generator

18

11/29/2017

Figure 6.15: Trace Dependents for37

the Foster Generators Model

Auditing Spreadsheet Models

38

Show Formulas

u

To see the formulas in a worksheet, simply click on any cell

in the worksheet and then click on Show Formulas—you will

see the formulas residing in that worksheet

u

To revert to hiding the formulas, click again on the Show

Formulas button

19

11/29/2017

Auditing Spreadsheet Models

39

Evaluate Formulas

u

The Evaluate Formulas button allows you to

investigate the calculations of a cell in great

detail

u

Provides an excellent means of identifying the

exact location of an error in a formula

Figure 6.16: The Evaluate Formula Dialog

Box for Gambrell Manufacturing

20

11/29/2017

Figure 6.17: The Evaluate Formula Dialog

41

Box for Gambrell Manufacturing Cell B17

after Four Clicks of the Evaluate Button

Auditing Spreadsheet Models

42

Error Checking

u

The Error Checking button provides an automatic

means of checking for mathematical errors within

formulas of a worksheet

u

Clicking on the Error Checking button causes

Excel to check every formula in the sheet for

calculation errors

u

If an error is found, the Error Checking dialog box

appears

21

11/29/2017

Figure 6.18: The Error Checking Dialog 43

Box for a Division by Zero Error

Auditing Spreadsheet Models

44

Watch Window

u

The Watch Window, located in the Formula

Auditing group, allows the user to observe the

values of cells included in the Watch Window box

list

u

Useful for large models when not all of the model

is observable on the screen or when multiple

worksheets are used

22

11/29/2017

Figure 6.19: The Watch Window for Cell

45

B17 of the Gambrell Manufacturing

Model

23

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