Excel Review Weekend Executive MBA May 2000

Agenda  Efficiency  Key model-building features  Five-item model-building checklist  Model walk-through: Oak Products  Hands-on in lab

Handouts  Paper  Guides we’ll draw from today in class.  Guides you might use for your own self-study.  Diskette  Excel Review Demo File 2000.xls  Solutions.xls (to proficiency exercises)  Oak Products Start.xls

Tips on how to build formulas  Avoid using actual values  Put actual values in other cells and refer to those cell names in your formulas  Point and click to “get” values when building a formula  Keep formulas simple  Use built-in functions where possible

What you must know when copying formulas  To copy or not to copy?  Excel’s three modes of addressing  Relative A3  Absolute $A$3  Mixed $A3  The meaning of the dollar sign  The F4 key toggle

Another modeling tool: Data Tables  When would you use a data table?  When you want to track how changes to input values affect a model.  Specifically: many changes to inputs (not just one or two) the inputs are used in the model’s formulas See the handout: Intro to Data Tables/Data Table Exercises

How a data table works  Inputs  Identify one or more key inputs that you want to vary.  Assign the values that you want them to take on.  Formulas  Identify one or more key formulas that depend on the inputs and calculate results you want to track.  Execution  Excel executes each formula many times, on each iteration substituting a different input value, and recording the result.

Data Tables  For example  For one item your firm manufactures you want to see the effect of 50 different retail volume levels on operating expenses and net income.  2 varieties  One-input Data Table  Two-input Data Table

2 varieties  One-input Data Table  vary a single input value  include one or more formulas  Layout example  column = inputs  formula above & at right  (can include more than one formula) volume Operating expenses formula

2 varieties  Two-input Data Table  vary two input values (volume down and price across)  include a single formula (for Net Income)  Layout example  column and row = inputs  formula at row/column intersection

Summary: Some Model Building Features  Techniques for building formulas  Understanding addressing when copying formulas  Making use of Excel’s built-in functions  Data Tables for sensitivity analysis  The special XY (Scatter) plot type

An approach to spreadsheet modeling  Model components  Understand the components present in most spreadsheet models  Checklist  Make those components part of a checklist  Use the checklist items to:  Get started when facing a blank spreadsheet  Improve your models

Five item modeling checklist  Identify Known Values  The givens; can’t be modified.  (Do you need more information?)  Identify Decision Variables  The quantities you control.  You’ll manipulate these items to find an optimal model solution.  Determine the Outputs  What you want to solve, show, find, maximize or minimize.

Checklist, continued  Be aware of any Constraints  Limits to inputs or outputs. Tradeoffs.  Build Relationships into the Model  Relationships between known values and variables, expressed in formulas.

Oak Products: Overview  Oak Products is a small company that manufactures handmade wood chairs. The company has 6 chair models.  Each model requires a different mix of components.  August is vacation month.  Only the parts already on hand can be used for August production.  In August, Oak Products has traditionally made 40 of each model chair.

Question  Might a different product mix be more profitable?

To find out...  Data we need  components needed for each model  how many of each component are on hand  how much profit each model generates  Then  analyze the data to determine the most profitable product mix, accounting for constraints

Model Checklist  Objective  maximize profit for August  Known Values  profit/chair, parts-on-hand, parts required  Constraints  parts on hand & parts requirements  Decision variables  how many of each model to make

Let’s build the model. You may want to follow along with the Oak Products Project handout.

Attempting to maximize total profit with guesswork

Maximizing total profit with Excel’s Solver...

Identify for Solver  Target cell  Total Profit  Changing cells (or decision variables )  Quantity of each chair to produce  Constraints  No “negative production”  Use only inventory on hand

Oak Products model summary  Before you begin  identify the objective, known values, constraints, and decision variables  Put down what you know, then  get more data, if needed  express data relationships using formulas  rearrange the layout, if needed  Then use the model  change the decision variable values (use Solver if possible)  monitor the result

Next… Work in the computer lab on whatever feature or exercise would be most help you improve your Excel skills set.