Modeling and Planning
Spreadsheet Model Blueprinting
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Spreadsheet modeling is akin to construction projects
o Builders use blueprints or plans
o Without plans, structures will fail to be effective
Advanced planning in any sort of design can speed up implementation
Spreadsheets are no different from other arenas of design
o Engineering and advanced planning aid effectiveness, and reduce rework and
costs
Creative and rigorous process
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An efficient process minimizes time spent.
An effective process yields results that meet users' requirements.
Good design helps analysts spend the majority of their effort improving decisions, rather
than building and fixing models.
Value: 1
Though spreadsheet modeling is a creative process, there are three predictable phases:
Below is a sequence of events. Place them in the order they should occur, number 1 being the first item. Select the step number from the
drop down next to each item.
Items to order:
1.
Building
2.
Testing
3.
Designing
Building
2
Testing
3
Designing
1
Right! Good job!
Points scored this item: 1
Influence Charts
Purpose
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A simple diagram to show outputs and how they are calculated from inputs
Tool of choice for complex, unstructured problems
Identifies main elements of a model
Delineates the boundaries of a model
Recommended for early stages of any problem formulation task
Flexible, support frequent revision
Building an Influence Chart
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Built from right to left
Conventions on types of variables
o Outputs/objectives - hexagons
o Decisions - boxes
o Inputs (fixed) - triangles
o Other variables - circles
o Random variables - double circles
Influence Chart
Variables
DragNDrop Activity
Press Enter or Space to show keyboard navigation options. Press Tab to navigate between hotkeys
combinations and learn them.
Your score is 2 out of 2. Activity is completed.
2/2
Use to see the location of the spots.
Completed!
Press Spacebar or Enter to flip selected card.
Hexagon
Press Spacebar or Enter to flip selected card.
Circle
Press Spacebar or Enter to flip selected card.
Box
Press Spacebar or Enter to flip selected card.
Triangle
Press Spacebar or Enter to flip selected card.
Double circle
Influence Chart Principles
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Start with outcome measure
Decompose outcome measure into independent variables that directly determine it
Repeat decomposition for each variable in turn
Identify input data and decisions as they arise
Ensure each variable appears only once
Highlight special types of elements with consistent symbols
Value: 1
In an influence chart, a variable can appear multiple times.
True
False
Right! Good job!
Points scored this item: 1
Example 1: A Pricing Decision
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Purpose
o To determine the price for our product so as to generate the highest possible
profit
Step 1
o Start the influence chart with the objective (Profit)
Step 2
o
Decompose Profit into Total Revenue and Total Cost
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Step 3
o
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Decompose Total Cost into Variable Cost and Fixed Cost
Step 4
o
Decompose Cost into Quantity Sold and Unit Cost
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Step 5
o
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Decompose Total Revenue into Quantity Sold and Price
Step 6
o
Decompose Quantity Sold into Price and Price Elasticity
Example 2: Automobile Leasing
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A auto company plans to offer customers a closed-end lease
The primary challenge is to determine the residual value of a vehicle
o Used-car price is a random function
Automobile Leasing Chart (for the question below)
Value: 1
Among the following parameters in the chart above, which one is NOT likely a candidate for sensitivity analysis?
a.
Elasticity
b.
Term
c.
Money Factor
d.
Used-Car Price
Sorry, incorrect answer.
Points scored this item: 0
Influence Charts Wrap-up
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The goal is to develop a problem structure—not to solve the problem.
There is no one correct chart.
Charts ignore all available numerical data.
Charts rely on modeling assumptions that should be recorded as made.
Designing a
Spreadsheet
Design Principles
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Plan: Sketch the Spreadsheet
Organize the Spreadsheet into Modules
Start Small
Isolate Input Parameters
Design for Use
Keep it Simple
Design for Communication
Document Important Data and Formulas
Individual Assignment Overview
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Your role
o Product-marketing manager
o One job is to prepare recommendations to the Executive Committee as to how
advertising expenditures should be allocated.
 Last year's advertising budget of $40,000 was spent in equal increments
over the four quarters.
 Initial expectations are that we will repeat this plan in the coming year.
The task
o The Executive Committee would like to know:
 Whether some other allocation would be advantageous?
 Whether the total budget should be changed?
o Baseline
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Sales seem to run around 4,000 units when advertising is around
$10,000.
Seasonsality of sales
o Our consultants have estimated seasonal adjustment factors.
 A seasonal adjustment factor measures the percentage of average
quarterly demand experienced in a given quarter.
o Seasonal adjustment factors for unit sales:
 Q1: 90%; Q2: 110%; Q3: 80%; Q4: 120%
Price margin
o Production cost
 $25 per product
o Selling price
 $40 per product
Operating costs
o Advertising cost
 Decision of this project
o The cost of the sales force
 Projected to be $34,000 over the year
 Allocated as follows: Q1 and Q2, $8,000 each; Q3 and Q4, $9,000 each
o Overhead
 Typically around 15% of revenues
Quarterly unit sales
o Clearly, advertising will increase sales, but there are limits to its impact.
o Our consultants several years ago estimated the relationship between
advertising and sales.
o Converting that relationship to current conditions gives the following formula:
 Unit sales = 35 * seasonal factor * Sqrt (3000+Advertising)
Influence Chart
Plan: Sketch the Spreadsheet
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"Measure twice, cut once."
Decreases time spent correcting mistakes
Turn computer off and think before beginning
Begin with a sketch:
o Physical layout of major elements
o Rough indication of calculation flow
Anticipate model's ultimate uses
Value: 6
In the following sketch of spreadsheet for the advertising example, please match the calculated items with the formula:
The task is to match the lettered items with the correct numbered items. Appearing below is a list of lettered items. Following that is a list of
numbered items. Each numbered item is followed by a drop-down. Select the letter in the drop down that best matches the numbered item
with the lettered alternatives.
a.
Profit
b.
Revenue
c.
Cost_of_goods
d.
Units_sold
e.
Total_cost
f.
Gross_margin
1.
=35*Seasonal_factor*Sqrt(3000+Advertising)
d
2.
=Price*Units_sold
b
3.
=Cost*Units_sold
c
4.
=Revenue–Cost_of_goods
f
5.
=Sales_expense+Advertising+Overhead
e
6.
=Gross_margin–Total_cost
a
Right! Good job!
Points scored this item: 6
Organize the Spreadsheet Into Modules
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Group like items and separate unlike items
Separate:
Data
Decision variables
Outcome measures
Detailed calculations
Influence diagrams aid with this design
Consider the flow of information
o Which information needs to pass from one group to another?
o
o
o
o
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Value: 9
Please complete the following modules:
Parameter Q1 Q2 Q3 Q4
Price
Cost
$40
$25
Seasonal
Overhead
0.9 1.1 0.8 1.2
0.15
Sales Parameters
Sales_expense
Ad Budget
Decision
Ad Expenditures
Output
Profit
Calculations
…
Price
Cost
Seasonal
Overhead
35 3000
8000 8000 9000 9000
$40,000
Sales Parameters
Sales_expense
Ad Budget
Ad Expenditures
Profit
Right! Good job!
Points scored this item: 9
Start Small
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Sketch a full design but do not build all at once
Isolate one module, then build and test that module
o Start with one customer, one month, before building a customer base or
year
Local mistakes are much easier to detect than when they are part of the global
model
In the Advertising Budget assignment:
o Since we do not know at the outset what values we will ultimately choose
for the decision variables, we enter convenient values.
 Last year's expenditures of $10,000 each quarter seem appropriate
 Simply to hold a place and to assist us in debugging the logic of the
spreadsheet
o When we begin work on the financial logic, we focus on the first quarter.
 Only when the profit in the first quarter has been calculated
successfully should we move on to the rest of the year.
 Recursive formulas, which use a previous value to calculate the
current value, facilitate this process.
Isolate Input Parameters
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Place parameters in a single location away from calculations.
o So they are easy to identify and change
o Formulas should only contain cell references, not numerical values
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Assists in:
o Identifying parameters
o Sensitivity analysis
o Documenting assumptions behind parameters
In the Advertising Budget assignment:
o When price is changed in one cell, it is automatically changed in related
calculations
Design for Use
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Anticipate who will use the spreadsheet
o What type of questions will be asked?
Make it easy to change common parameters
Make it easy to find key outputs
o Group in one place
o In a larger model, the outputs may be scattered over many locations in
different worksheets
Place outputs near inputs
o Thus, details of model do not interfere with analysis
In the Advertising Budget assignment:
o Copy the value of profits from the final calculation to the cell close to
Parameters and Decisions modules to observe the differences that they
make
Keep It Simple
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Complex spreadsheets
o Require more time and effort to build
o Are much more difficult to debug
Keep formulas short
o Decompose complex calculations into intermediate steps
In the Advertising Budget assignment:
o Rather than calculating Gross Margin with a single formula, we calculate
its components
 Units_sold, Revenue, and Cost_of_goods
o Helpful for logic checking and future extension.
 For example, later on we may model sales as a function of price.
 Instead of modifying a complicated Gross_margin formula, we will
find it easier to work with the formula for Units_sold.
Design for Communication
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Spreadsheets' lives are often longer than expected
Use visual cues that reinforce the model's logic
o Use informative labels
o Use blank spaces
Use outlines, color, bold fonts, as appropriate
Split windows can aid in viewing
o If we wanted to preserve the top portion of the spreadsheet, but also view
the quarterly profit levels and the profit-margin percentages, we could split
the window vertically
o To split a screen, select a row or column and choose View -> Window ->
Split
o
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Document Important Data and Formulas
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Record source for important parameters
Explain important formulas
Consider a separate module to list assumptions
Use Cell Comments to describe cell contents
o Insert Cell Comment
 Review►Comments►New Comment
o Different Display options
 Advanced ► Display ► For cells with comments, show:
 Comments and indicators
 Indicators only - comments on hover
 No comments or indicators - neither comment nor indicator
visible