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SEG 7410
is Engineering? is Management?
Engineering Management?
What is Engineering?
What is Management?
The profession in which a knowledge of the mathematical and natural science gained by study, experience, and practice is applied with judgement to develop ways to utilize, utilize economically, the materials and forces of nature for the benefit of mankind (1979, US. Engineering societies).
A set of activities (including planning and decision making, organising, leading and control) directed at an organisations resources (human, financial, physical and informational) with the aim of achieving organisational goals in an efficient and effective manner. (Griffin)
supervision of engineers and/or the engineering function? Application of quantitative methods and engineering techniques to the practice of management? What engineering managers do!
Planning and Forecasting. Decision Making. Human Aspects of Organization. Controlling. Managing the Research Function. Managing Engineering Design. Planning and Managing Production Operations. Engineers in Marketing and Service Activities.
MANAGING PROJECTS.
Planning and Forecasting. Decision Making. Human Aspects of Organization. Controlling. Managing the Research Function. Managing Engineering Design. Planning and Managing Production Operations. Engineers in Marketing and Service Activities.
MANAGING PROJECTS.
SEG 7410
introduces
some basic quantitative modelling tools and solution techniques for decisionmaking practice in building and manipulating these quantitative models using spreadsheets some understanding of when to use which tools (or when not to use)
INTRODUCTION TO MODELING
Modeling Approach to Decision Making:
Involves spreadsheet based management models Uses spreadsheet software such as Excel This approach is easy for managers to use, Results in better management decisions, Provides important insights into problem.
Model
Symbolic World Real World
Results
Managerial Judgment
Management Situation
Decisions
Intuition
Interpretation
Abstraction
those objectives. identify and record interactions and trade-offs among those decisions. think carefully about which variables to include. consider what data are pertinent and their interactions. recognize constraints or limitations on the values. Models allow communication of your ideas and understanding to facilitate teamwork.
Models allow us to use the analytical power of spreadsheets hand in hand with the data storage and computational speed of computers.
TYPES OF MODELS
Physical Model
Characteristics
Tangible Easy to Comprehend Difficult to Duplicate and Share Difficult to Modify and Manipulate Lowest Scope of Use
Examples
Model Airplane Model House Model City
TYPES OF MODELS
(A set of relationships through a different, but analogous, medium.)
Analog Model
Characteristics
Intangible Harder to Comprehend Easier to Duplicate and Share Easier to Modify and Manipulate Wider Scope of Use
Examples
Road Map Speedometer Pie Chart
TYPES OF MODELS
(Relationships are represented mathematically.)
Intangible Hardest to Comprehend Easiest to Duplicate and Share Easiest to Modify and Manipulate Widest Scope of Use
Examples
Simulation Model Algebraic Model Spreadsheet Model
MORE ON MODELS
A model is a carefully selected abstraction of reality. Symbolic models
1. always simplify reality. 2. incorporate enough detail so that the result meets your needs, it is consistent with the data you have available, it can be quickly analyzed.
Decision models are symbolic models in which some of the variables represent decisions that must or could be made. Decision variables are variables whose values you can control, change or set.
BUILDING MODELS
To model a situation, you first have to frame it (i.e., develop an organized way of thinking about the situation). A problem statement involves possible decisions and a method for measuring their effectiveness. Steps in modeling:
1. Study the Environment to Frame the Managerial Situation
BUILDING MODELS
1. Studying the Environment
Select those aspects of reality relevant to the situation at hand.
2. Formulation
Specific assumptions and simplifications are made. Decisions and objectives must be explicitly identified and defined. Identify the models major conceptual ingredients using Black Box approach.
BUILDING MODELS
3. Model Construction
The next step is to construct a symbolic model. Mathematical relationships are developed. Graphing the variables may help define the relationship.
Var. Y
Co st B
A+B
Cost A
Var. X
CLASSIFICATIONS OF MODELS
Decision making models are classified by the business function they address or by the discipline or industry involved. Classification
Business Function Discipline Industry Time Frame Mathematics Representation Uncertainty
Examples
Finance, Marketing, Cost Accounting, Operations Science, Engineering, Economics One Time Period, Multiple Time Periods Linear Equations, Non-Linear Equations Spreadsheet, Custom Software, Paper and Pencil Deterministic, Probabilistic
Management Lingo
Lever Gauge Outcome Yardstick
Formal Definition
Example
Investment Amount
Controllable Exogenous Input Quantity Uncontrollable Exogenous Input Quantity Endogenous Output Variable Endogenous Variable Used for Evaluation (Objective Function Value)
Two ingredients combine to make Apple Pies: Fruit and frozen dough The Pies are then processed and sold to local grocery stores in order to generate a profit. Follow the three steps of model building.
Step 2: Formulation
Using Black Box diagram, specify cost parameters
Pie Price Unit Cost, Filling Unit Cost, Dough Unit Pie Processing Cost Fixed Cost
Exogenous Variables
Model
The next step is to develop the logic inside the black box. A good way to approach this is to create an Influence Diagram. An Influence Diagram pictures the connections between the models exogenous variables and a performance measure (e.g., profit).
Start here:
Profit
Decompose this variable into the intermediate variables Revenue and Total Cost
Profit
Revenue Total Cost
Now, further decompose each of these intermediate variables into more related intermediate variables ...
Profit
Revenue
Processing Cost Required Ingredient Quantities Pies Demanded
Total Cost
Ingredient Cost
Pie Price
Fixed Cost
Profit
Revenue Total Cost
Profit
Revenue
Pie Price
Profit
Total Cost
Processing Cost
Ingredient Cost
Fixed Cost
Profit
Total Cost
Processing Cost
Pies Demanded
Profit
Total Cost
Ingredients Cost = Qty Filling * Unit Cost Filling + Qty Dough * Unit Cost Dough
Required Ingredient Quantities
Ingredient Cost
To represent this model in an Excel Spreadsheet, you should adhere to the following recommendations:
Present input variables together and label them. Clearly label the model results. Give the units of measure where appropriate. Store parameters in separate cells as data and refer to them in formulas by cell references. Use bold fonts, cell indentations, cell underlines and other Excel formatting options to facilitate interpretation.
Now, modify the spreadsheet to include this relationship. Keep in mind that the physical results should be separated from the financial or economic results.
You can copy the model into adjacent columns and change specific values in order to compare and contrast the changes.
Using Excels Chart Wizard, the resulting changes can be graphed in an X-Y Scatter plot for viewing.
Note that Profit is largest at a Pie Price of about $9.00 and that the break-even point of zero occurs at about $6.25.
Sensitivity Analysis
Examines what happens to one variable (usually a performance variable) when you change the values of another variable (usually an input variable). For example, examine the effect of a percentage change in Pie Price on the percentage change in Profit.
Now you can use trade-off analysis to determine how much of one performance measure (Profit) must be sacrificed to achieve a given improvement in another performance measure (Pies Demanded & Sold).
Simon suspects that the previous models Processing Cost formula produces the correct historical cost for the base case of 12 thousand Pies Demanded, but not for other values of Pies Demanded. Validate the model by using actual Processing Cost data for different levels of pie production. Use Excels Trendline capability to fit a trend equation directly to the actual cost data.
First, historical data (column B) are plotted along with projected data (column C) based on the initial model of 2.05*Pies Demanded (column A)
Next, right-click on the Processing Cost (Actual) series in the graph and choose the option Add Trendline.
After clicking this option, a dialog will open in which you can select Linear as the Type (for simplicity) and Processing Cost (Actual) as the Based on Series.
Next, click on the Options tab and select Custom as the Trendline Name. This will allow you to enter Linear Fit. Finally, click on the Display equation on chart option and click OK.
The resulting trend line gives a much better fit to the Processing Cost data and provides a more accurate equation:
Processing Cost = 3.375*Pies Demanded and Sold 14.339
Sensitivity Analysis
As in the previous example, use sensitivity analysis to determine what would happen to Profit if you change the values of Pie Price and Pies Demanded $ Sold.
Sensitivity Analysis
Again, using Excels Chart Wizard, the resulting changes can be graphed in an X-Y Scatter plot for viewing.
The Art of Modeling In setting up the model, you must anticipate the kinds of analyses you intend to do and pay attention to the layout of the model in order to produce a model that is: Logically Correct Presents major alternatives for comparisons Suitable for the manipulations necessary for analysis Easily understood by others Pleasing to the eye
The Art of Modeling Basic rules for creating good spreadsheet models:
1. Clearly define and label all variables 2. Clearly identify model inputs, decisions and parameters 3. Clearly identify model outputs, performance measure(s) and consequence variables 4. Do not hard wire parameter values into formulas; store in separate cells 5. Separate variables giving physical quantities from those that reflect them into accounting or financial consequences. 6. Use formatting option of Excel to improve appearance of model