Model Formulation Process

The model formulation thought process is a way to simplify the real world problem you are trying to solve by eliminating all of the details that are irrelevant and focusing all energy on the major issues surrounding the problem. The approach considers four different aspects of a particular model which are decisions, outcomes, structure and data. The decision aspect of the model is where all possible choices and actions are considered that apply to the situation, outcomes are the consequences of those decisions, structure is what mathematically relates them, and the data is the variables that are uncontrollable(Powell & Baker, 2009). In an effort to give a broader understanding to myself and the readers of this blog I will provide an example below of each feature:

Problem:

An ice cream company wants to increase profits during the winter months.

Decisions

1) Increase market presence in warmer climate areas such as foreign markets

2) Add additional products that will sell in the winter

3) Change their marketing campaign to entice consumers to buy ice cream during the winter months

Outcomes

1) Increase market presence in warmer climate areas - may involve increased cost involved the logistics and taxes which could cancel out any increase in profit

2) Adding additional products will involve incurred development expenses which could be costly in the beginning but in the long run could increase profit

3) Changing the marketing strategy would most likely be the most inexpensive and quickest way to see results.

Structure

 We must calculate the cost of changing the way the company does business and subtract that from the expected outcome of each earning potential to determine if it is a feasible solution.

Data

For this model the empirical data suggests that to increase profit the company must make a change in either its product or the way the product is perceived by the consumer. We all know that ice cream is cold and generally great on a hot day but not so much on a cool one. Some of the uncontrollable variables in this scenario are the consumer's attitude towards ice cream in the winter, as well as taxes or laws that may impact profits in a foreign market, or marketing costs.

References:

Powell, S. G., & Baker, K. R. (2009). Management Science, The Art of Modeling with Spreadsheets. Hoboken, NJ: Elbe, Susan.

Summary 2.3.2 - Income Statement Influence Chart

My understanding of the Income Statement influence charts in this section is that is begins with the depiction of a static influence chart and ends with a future Income Statement influence chart which could be used as a simple projection model.  The influence chart follows the business rules used by the income statement which generally ends with Retained Earnings. In reviewing the additional symbols on the chart it is understood that this is a static chart and does not indicate future earnings or growth potential because there are no determinants for Cost of Goods Sold or Sales Revenue, also standard accounting variables. The outcome though is the same regardless, so the chart begins with the hexagon symbol of Retained Earnings. The determinants for this outcome are Profit After Taxes + Dividends, with Dividends being a fixed input parameter indicated by an upside down triangle. Both determinants have arrows feeding into the Retained Earnings outcome. The influence chart now contains three symbols but has additional determining factors to consider. For instance Profit After Taxes is calculated based on the fixed input parameter of Sales which is subtracted from the Expenses variable which is also a determinant for Profit After Taxes. When considering the Expenses variable the three determining factors are Cost of Goods Sold, Depreciation, and Interest variables. These are all Fixed Input Parameters indicated by the upside down triangle. This completes our Income Statement influence chart and leads into our Income Statement influence chart for a model with the major difference being this chart takes into account future earnings and includes the determinants leading into the Cost of Goods Sold, a fixed input parameter of Unit Cost multiplied by the other determinant Quantity Sold. Quantity Sold is determined by Initial Sales and Sales Growth, both fixed input parameters

(Powell & Baker, 2009).

 

References:

Powell, S. G., & Baker, K. R. (2009). Management Science, The Art of Modeling with Spreadsheets. Hoboken, NJ: Elbe, Susan.

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Invivo Diagnostics Influence Chart

Summary 2.3.1

In an attempt to understand how to build an influence chart, an example was provided from the book. This is my attempt at summarizing the pricing decision example. When you build an influence chart you should start with your expected outcome or end result to the given problem. In this example, Profit is the indicated outcome which is enclosed in a hexagon and is the first symbol on the chart. Next, we must determine what factors must be considered when calculating the desired outcome, Profit. For the purposes of this example, circles are drawn around the variables Total Revenue and Total Cost which have arrows pointing to Profit, thus indicating they determine the Profit result. We now have a simple three symbol diagram; however there are more determinants for the existing variables and we must add those. The next determinants are Fixed Cost and Variable Cost which have arrows pointing to the Total Cost variable, thus indicated Total Cost relies on the result of the two variables. Note that the Fixed Cost input parameter determinant is indicated by an upside down triangle. Now we must calculate the Variable Cost which will be reached by the result of the calculation of Unit Cost input parameter times the Quantity Sold variable.  The ending diagram has 7 symbols with connecting arrows in the direction flow ending with our outcome and will assist the modeler with how the variables are related and what should be included in the actual model (Powell & Baker, 2009).

References:
Powell, S. G., & Baker, K. R. (2009). Management Science, The Art of Modeling with Spreadsheets. Hoboken, NJ: Elbe, Susan.

Steps to derive problems

The problem solving process is very complex and is generally approached by each person differently, however the book takes the approach that the most successful problem solvers are those that make a conscious effort to understand the context of the problem than those that use "gut" instincts or intuition to come to a solution. Some problems are well defined because the situation is easily discernible and has a resolution that is feasible, however in many cases there is not not an clearly identifiable problem and must be explored which makes for the ill defined problem. The ill defined problem  must be approached by the modeler with the effort to pick the relevant information from the symptoms, causes, data, pressures, short falls and opportunities that make up the mess and turn it in to a well defined problem. There are many different approaches that people use to work their way through this process and implementing a viable solution however it was found that when a combination of divergent and convergent thinking are employed, the best outcome is reached. Divergent thinking is an approach that is more of a brainstorming technique where the modeler is encouraged to be creative and think of all of the different questions and answers that are relevant to the situation, it is usually considered the idea generation portion of each stage in the problem solving process. Convergent thinking is more structured and is usually in response to the outcome of the convergent thinking process and involves a single solution or goal.
Convergent and divergent thinking should be utilized in all six stages of the problem solving process

(Powell & Baker, 2009).

References:

Powell, S. G., & Baker, K. R. (2009). Management Science, The Art of Modeling with Spreadsheets. Hoboken, NJ: Elbe, Susan.

Principles, steps and symbols involved in building an influence chart.

The influence chart is used as a visual representation to aid in the comprehension of critical inputs, outputs and relationships of a given problem and is helpful in the early stages of modeling. The chart uses simple flowchart like symbols to annotate the different concepts for each step in the chart. For example the objective or outcome is indicated by a hexagon, circles indicate miscellaneous variables, an upside down triangle is a determining or input variable, the box is used to depict a decision variable, and lastly the random variables are enclosed in a double circle. The relationships between these symbols are identified with arrows from the determining variables (the variable that must be calculated) to the outcome variable, the result of the calculation. Other modeling decisions to understand and consider when developing them for a model or reviewing them is that a variable is a fixed or known quantity if it has no input variables. When developing the influence chart, the modeler should begin with the outcome first, followed by the determinants for the outcome, continue with determining factors, add input and decisions, and always use consistent symbols for the variables. Ultimately, influence charts should be as simple as possible and should aid the modeler in making the initial description of their intended model while still being flexible enough to handle the numerous modifications that occur as the modeling process evolves.(Powell & Baker, 2009)

References:

Powell, S. G., & Baker, K. R. (2009). Management Science, The Art of Modeling with Spreadsheets. Hoboken, NJ: Elbe, Susan.

Six Stage Problem Solving Process

The six stage problem solving process involves various steps that can be used as a guide to explore any problem and thereby implement a solution for it. In all stages there is a mix of two different styles of thinking or approaches to understand the problem, one is divergent and the other is convergent. Divergent is more of a brainstorming technique which allows for an unstructured thought process and allows the exploration of all aspects of the given problem while convergent is more structured and seems to be more a response to the divergent thoughts that arise. The first stage of the process is exploring the mess which entails identifying all of the possible problems or opportunities and then sleuthing out a description of the situation and understand what key facts and data are needed. Stage two encompasses a search for relevant information in the forms of raw data or literature etc... that will aid in further refine and broaden the understanding of the situation which will end with an hypothesis of the source of the problem and possible solutions. Stage three is the identification of the problem and will involve bringing potential problem statements to light and then finally settling on the most appropriate for the situation identified as well as breaking our problem into sub problem if required. Stage four involves letting the creative and free thought process work its magic to find all of the plausible solutions and pros and cons for each to the identified problem. In the fifth stage, a solution is chosen from the stage four outcome and all weaknesses are identified and resolved to a satisfactory level, a solution with an action plan and justification for the plan are the end result. Finally in the sixth stage the solution is laid out in an implementation plan and is put into play, provided resistance from top level management, high risk level or personal cost is not to great for the organization thereby leading to the reassessment of the problem and solution (Powell & Baker, 2009).


References:
Powell, S. G., & Baker, K. R. (2009). Management Science, The Art of Modeling with Spreadsheets. Hoboken, NJ: Elbe, Susan.