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The Modeling Process

The Modeling Process. Frame the problem Diagram the problem Influence charts Build a model Analyze for insights. Problem Framing. What’s included, what’s excluded? What can we assume? What do we know? What are our objectives? What are our decisions or options?

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The Modeling Process

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  1. The Modeling Process • Frame the problem • Diagram the problem • Influence charts • Build a model • Analyze for insights

  2. Problem Framing • What’s included, what’s excluded? • What can we assume? • What do we know? • What are our objectives? • What are our decisions or options? • What are the constraints?

  3. Example Problem 1 • Determine the price we should set for our product so as to generate the highest possible profit this coming year.

  4. Influence Charts • Use to break through modeler’s block • Help organize the approach to modeling • Begin model documentation • Picture the connections between the exogenous variables and a performance measure without defining the math logic

  5. To Create an Influence Diagram • Pick a performance measure • Decompose the performance measure variable into two or more intermediate variables • Decompose each intermediate variable into more intermediate variables until exogenous variables are defined

  6. Model Building: Spreadsheet Design Guidelines • When organizing the data, common input variables should be presented together and labeled • Model results should be clearly labeled and emphasized • Physical results should be separated from the financial results • Units of measure should be documented where appropriate • Figure 3.16 of text

  7. Model Documentation • Do not embed constants; Place at top of worksheets with appropriate labels and color shading • Attach cell notes • Use text boxes • Use range names

  8. National Leasing: Your Assignment • Refer to the National Leasing, Inc. case posted in Blackboard’s Course Document section • Management at NLI would like to know how best to set residual values on automobile leases. • Can a modeling approach help?

  9. National Leasing: Framing the problem • Model a portfolio of leases or a single lease? • How to model market share? • How to model consumer behavior at lease end? • Include uncertainty or not? • Optimize or simulate?

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