B6015: Decision Models

Professor Ceria

Summer 1998
Columbia Business School


Course Announcements

Sample final problem solutions are here dec_fin.xls proj_fin.xls

Homework problem solutions are here: ajax.xls pension.xls devcor.xls devcor_b.xls option_a.xls option_c.xls bond.xls

Review session problem solutions are here solution1.xls solution2.xls. There are two "styles" for doing this problem, both solutions are included.

To input a seed in Crystal Ball, go into Run Preferences|Sampling, and input the seed.

There is a typo in the case. In page 3, It should say "the allocation of regular seats Q". Q is the number of protected seats for the REGULAR class fare.

Login to the bulletin board for this course: Decision Models Bulletin Board

Faculty Information
Professor Sebastian Ceria 
417 Uris
Office hours: Mon and Wed 4:00-5:00
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Teaching Assistant Information
TA Bin Yu TA Joern Meissner
Cubicle 4L Cubicle 4W
by32@columbia.edu jm531@columbia.edu
Office hours: Tues 2:00-4:00 Office hours: Th 10:00-12:00
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Review Sessions
Recommended Problems
July 10
Basic Concepts - Modelling and Solution - Excel Review
Practice Problems
1, 2, 3, 5
140 Uris
July 17
Optimization Practice Problems
13, 14
140 Uris
July 24
Open questions
140 Uris
July 31
Simulation Practice Problems
140 Uris
August 7
Simulation Practice Problems
140 Uris
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Course Description

This course provides an introduction to computer-based models for decision making. The emphasis is on models that are widely used in diverse industries and functional areas, including finance, accounting, operations, and marketing. Applications will include production planning, supply chain management, foreign exchange and commodity trading, asset-liability management, portfolio optimization, corporate risk management, and yield management, among others.

The aim of the course is to help students become intelligent consumers of these methods. To this end, the course will cover the basic elements of modeling --- how to formulate a model and how to use and interpret the information a model produces. The course will attempt to instill a critical viewpoint towards decision models, recognizing that they are powerful but limited tools.

The applicability and usage of computer-based models have increased dramatically in recent years, due to the extraordinary improvements in computer, information and communication technologies, including not just hardware but also model-solution techniques and user interfaces. Twenty years ago working with a model meant using an expensive mainframe computer, learning a complex programming language, and struggling to compile data by hand; the entire process was clearly marked "experts only." The rise of personal computers, friendly interfaces (such as spreadsheets), and large data bases has made modeling far more accessible to managers. Information has come to be recognized as a critical resource, and models play a key role in deploying this resource, in organizing and structuring information so that it can be used productively.
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Texts Winston and Albright, 1997, Practical Management Science: Spreadsheet Modeling and Applications, Duxbury Press, Belmont, CA. (W&A)

Crystal Ball: Forecasting & Risk Analysis for Spreadsheet Users (an add-in for Excel for creating simulations in a spreadsheet).

The textbook is available at the Columbia Bookstore. A readings book will also be handed out the first day of class, it contains a disk and copies of the manual for the Crystal Ball Software. The text is also on reserve in the business school library.
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Computer Software

We will use spreadsheets fairly extensively throughout the course. In the lectures we will refer to the Excel spreadsheet package for Windows 95. This spreadsheet has extensive optimization capabilities built in. Crystal Ball is an add-in for Excel which makes it much easier to run simulations in a spreadsheet.
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Course Work

There will be three homework problems that will be assigned during the course (in Lectures 4, 8 and 10), to be handed-in the following class. The homeworks are an individual assignment, and are designed as practice for the final exam. The main case is Morombian Airlines. This case can be done in groups of five or less and it due Friday, August 14th by 1:00 p.m. In addition for many of the class sessions, you will be asked to prepare a case for discussion in class.

The readings book has a set of practice problems. Many of these practice problems were based on past midterm and final examination questions. Some spreadsheets (in Excel .XLS format) related to these problems can be downloaded. The TA will go over the solutions to selected problems during the Friday review sessions or during office hours. Additional practice problems can be found throughout the W&A text.
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The final exam will be given on Thursday, August 20 at 2PM. There will be four hours for the final exam, although most students should be able to finish in three hours or less. The exam will be open book and open notes. A common final exam will be used for all sections of the course. Notebook computers will be needed in the final exam. Think of the computer as a fancy calculator: it is useful for checking one's work and for some questions the computer will be needed to get final answers. However, the majority of the points on the exam will be given for correct methods and analysis; correct numbers will only count for a small portion of the points. Printing will not be allowed in the final exam. Any answers from the computer must be transcribed into the answer book.
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The course grade will be based on a weighted average of the homeworks, main case, and the final exam. The weights will be 20% for the homeworks, 30% for the main case, and 50% for the final. All sections of the course will be graded on a common scale.
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Notebook PCs

Notebook PCs will be used in this course. It is recommended that students bring their notebook PCs to the Friday review sessions for software-related questions. Students should bring their notebook PCs to class on Lecture 8. Also, notebook computers will be needed for the final exam.
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Course Schedule
  Date Topic For next class Download
Lecture 1 7/6
  • Course overview
  • Introduction to decision models; scale and complexity 
  • Linear programming formulation 
  • Demonstration of the spreadsheet optimization method
  • Formulate and solve the "Shelby Shelving" case (in the readings book or on pp.68--69 in the W&A text).  Prepare to discuss the case in class, but do not write up a formal solution. 
  • Readings:  "An Introduction to Spreadsheet Optimization Using Excel" in the readings book. Also read Chapter 1, Chapter 2.1--2.4, 2.6, 2.8, and Chapter 4.1, 4.2 in the W&A text.
  • Optional readings: "OR Brews Success for San Miguel" and "Logistics Steps Onto Retail Battlefield" in the readings book.
Lecture 2 7/8
  • Shelby Shelving case
  • Sensitivity analysis
  • If time permits:  Distribution / Network models
  • Read and think about the case "Petromor: The Morombian State Oil Company."  (Prepare to discuss the case in class, but do not write up a formal solution.) 
  • Read Chapter 2.9 and 4.4 in the W&A text. 
  • Optional reading: "Graphical Analysis" in the readings book. 
Lecture 3 7/13
  • Bidding / Assignment models
  • Multiperiod planning
  • Read Chapter 3.7 in the W&A text. 
  • Read and think about the "Foreign Currency Trading" case, p.146 in the W&A text. (You are not expected to solve this case before the next class.)
petromor0.xls  petromor.xls 
Lecture 4 7/15
  • Cash Flow Matching LP, Project funding example
  • Foreign Currency Trading
  • Read Chapter 5.1 and 5.5 in the W&A text.
  • Read and think about the "Lakefield Corporation's Oil Trading Desk'' case, pp.142--145 in the W&A text.  (You are not expected to solve this case before the next class.) 
  • Homework 1 is due next class (Problems 8 and 9 from the Optimization Practice Problems in the Readings Book). 
  • Optional reading: "Improving Gasoline Blending at Texaco" in the readings book. 
Lecture 5 7/20
  • Integer Programming: plant location example 
  • Lakefield Corporation's Oil Trading Desk 
  • Read Chapter 6.11 in the W&A text and "Portfolio Optimization Using Linear Programming" in the readings book. 
  • Optional readings: "Exploring the New Efficient Frontier'' and "Asset Allocation in a Downside-Risk Framework" in the readings book. 
plant0.xls  plant.xls 
Lecture 6 7/22
  • Portfolio Optimization -- I
  • Solve the "GMS Stock Hedging" case, pp.330--331 in the W&A text.  (Prepare to discuss the case in class, but do not write up a formal solution.) 
  • Read Chapter 6, pp.310--313 and Chapter 7.3 in the W&A text. 
investlp0.xls  investlp.xls  gold.xls  gold0.xls 
Lecture 7 7/27
  • Portfolio Optimization -- II
  • GMS Stock Hedging
  • Introduction to Retailer Simulation
  • Read the case "`Retailer: A Retail Pricing Simulation Exercise'' on pp.529--534 in the W&A text.  Download the Retailer files from the course webpage.  (Please put all of the Retailer-related files into a directory C:\RETAIL on your computer.) 
  • Please remember to bring your notebook computer to the next class. 
  • Optional readings: "His Goal: No Room at the Inns," "Computers as Price Setters Complicate Travelers' Lives," "Making Supply Meet Demand in an Uncertain World," and "Yield Management at American Airlines" in the readings book.
Lecture 8 7/29
  • Retailer case
  • Retailer analysis
  • Read Chapter 12, pp.581--594 in the W&A text.
  • Homework 2 is due next class (Problems 11 and 12 from the Optimization Practice Problems in the Readings Book). 
 ret_lp0.xls  ret_lp.xls
Lecture 9 8/3
  • Introduction to simulation
  • Introduction to Crystal Ball
  • Risk management simulation example
  • Optional reading: Chapter 12.5--12.12 and Chapter 13 in the W&A text.
asianoil0.xls  asianoil.xls 
Lecture 10 8/5
  • Ski Jacket case
  • Read "Identifying, Measuring, and Hedging Currency Risk at Merck," "Merck's 1995 Annual Report," and "Managing Risk" in the readings book. 
  • At this point we have covered enough material on simulation for you to begin the "Morombian Airlines" case.  Even though the case isn't due until August 14th, it is a good idea to start this case now! 
  • Homework 3 is due next class (Problem 3 from the Simulation Practice Problems in the Readings Book). 
Lecture 11 8/10
  • Risk Management at Merck
  • Using Simulation for Foreign Currency Risk Management
  merck_u0.xls  merck_u.xls 
Lecture 12 8/12
  • Introduction to Value at Risk
  • Bond Applications
  • Course review and wrap-up
Final Exam 8/20 2:00-6:00      
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Download Files  
 # Name Excel Files
 1 ABC Manufacturing abc.xls
 2 B. Hall Real Estate Investment hall_inv.xls
 3 Joe's Delicatessen deli.xls and deli2.xls
 4 Bland Brewery Graphical Solution bland2.xls 
 5 Advertising Mix advr.xls 
 6 Power Plant pplant.xls
 7 Police Scheduling sched.xls and sched_b.xls 
10 Tax Planning taxlp.xls 
13 Veggie Soup veggie.xls 
14 Calico Cassette ccc.xls and ccc_b.xls
15 Dale Distribution System dale.xls 
16 Hackensack Blended Whiskey whiskey.xls 
# Name Excel Files
1 Express Mail Staffing mail.xls
2 Bakery Department Simulation bakery.xls