Lecture 5( February 15, 2003)

Decisions and models

Case AnalysisPackage delivery industry: Federal Express

Business Decisions

• In lecture 2, we talk about the traditional role of management and their job activities

• Let us review the decision process– Collecting data– Identifying problems– Making choices– Persuading others to accept a decision– Implementing the solution

• Using information systems to make better decisions– Improve access to data– Evaluating variables and choosing alternatives– Build models for complex cases– Evaluate and organize models– Display output

Models• A model is a simplified, abstract representation of a real-world

system. It can be a mathematical expression, graph or even subjective description. In actual practice, a model could be very complex

• Models help managers visualize physical objects and business processes

• Models are important to analyze problems and make decisions• Output of models can be exact or subject to interpretation• Businesses use models of the past (to improve processes) to help

with the present (to evaluate choices) and to guide the future (to forecasting alternatives)

• Information systems help build models. Information systems can be models themselves. Enterprise information systems are models of the entire business.

Types of models• Physical:

– Miniature building an architect might build– Replicates of intended products– Tools available, e.g. computer-aided design (CAD)

• Process:– Process models are symbolic or descriptive, such as diagrams or

graphs. – We often use models and pictures to simulate objects and

mathematical relationships to represent processes• Business:

– Business models help describe businesses and business decisions.

– Dividing a company into functional departments is a business model.

– Reengineering is a business modeling technique that has gained momentum as corporations have tried to become more efficient

Application of models

• Optimization:– Using mathematics or other analytical tools that

evaluate different alternatives while choosing the best decision.

• Prediction:– Based on an historical approach and develops a

projection of what the system should look like• Simulation:

– The modeling technique applies a model to the effects of changes and situations on the item being studied. These models are particularly useful for experiments that would not be safe to perform in real life.

Model Building

• Assumptions: since models are built to simplify a real-life situation, assumptions must be built into the model that are reasonable, accurate and well-communicated.

• Input/Output variables: choosing the correct variable is very important. The selected input variables must be correlated to the output variables identified for analysis.

• Process/Equations: it is important to identify and understand the processes that are represented in the equation and calculations at the process model

• Software, if used, can be generic or pre-programmed and specific. Parameterized control give users the flexibility but too many parameters also confuse users.

Limitations and Errors

• Models can be expensive to build, both in terms of time and dollars. Budgetary and time-frame considerations are important in the evaluation process.

• As models are simulations of real life situations, there are more opportunities for errors in the assumptions built into the model.

• Main types of error:– Mistakes in input data– Errors in equation used in the model– Flaws in the display or interpretation of the results

Decision Support Systems (DSS)

• DSS provides support through data collection, analysis of models and the presentation of output. DSSs consist primarily of a database or data warehouse, modeling tools and presentation software.

• DSS outline, categorize and weigh factors that need to be combined to develop a decision. They help users make tactical decisions through the use of data, models and presentations to map and solve general problems.

• Data collection is typically performed by the transaction-processing systems. If the transaction system is not working properly, the DSS will not work either. The fundamental difference between a transaction processing system and a DSS is the support for creating and evaluating models.

More on DSSs• DSS requires more than just data. The quality and availability of

data are so important to decision makers. How data are retrieve, shared and transferred play a vital role. Under legacy systems, it is difficult to get access to the transaction data. These systems were designed to collect and store huge amounts of data very quickly. The systems often cannot handle the additional load of providing searches and aggregations needed for making decisions efficiently. In addition, different systems may have incompatible data formats. This is where data warehousing comes into play.

• DSS typically have features to query data, analyze and store models.

• Output is another important features of DSSs. If a DSS cannot produce output in a format that is easy to understand, then it will not be useful. Graphs and charts are typical outputs people find it easier to comprehend.

• DSS can be classified broadly into generic and preprogrammed.

Generic and Preprogrammed DSSs

Generic software can be applied to any situation or business but one need to build the models himself. Spreadsheets can be considered as a generic tool. Statistical capabilities such as regression, mathematical formula and predefined functions are available and hence suitable for finance and accounting problems.

Preprogrammed software services specific problems. However, some situations may occur in many different businesses, there are preprogrammed software that can be tailored for use by just altering some input parameters or variables or even equations. Evaluation and trial are important in this case if it can be applied correctly to your specific problems. Examples are stock market models and economic models.

Expert Systems (ES)• An expert system is a software program that structures a problem to

enable the computer to methodologically step down the identified issues to a resolution.

• Usually built on an expert system shell or platform, the application incorporates forward or backward chaining.

• Forward chaining begins with a problem and steps through its resolutions by making decisions about specific steps that could logically be followed. Software that provides the template for wills, contracts and trusts are examples of forward chaining.

• Backward chaining begins with the solution or present situation and steps backward through the process to determine how the issue started. Medical diagnosis and legal analysis software are examples of backward chaining.

• Implementation of expert systems require an expert engine, a rule base and an expert to moderate rules that are not accurate and make new rules to continue to be applied to new situations.

Artificial Intelligence (AI)

• Artificial intelligence is the effort to “teach” the computers to “think” using logical steps, if/then analysis, and specialized software. The power of the computer is implemented in its ability to “learn” by listing and searching all the possible solutions that are available, or to use pattern matching to determine the sequence in which particular functions are followed.

• In this way, machines can “think” like human beings.• Although there are limited business applications to much

of this current research, there are two main reasons for staying abreast of the capabilities. First, anything that makes the computer easier to use will make it more useful, and these techniques continue to improve. Second, one need to understand the current limitations to avoid costly mistakes.

Areas of AI Applications

• ESs may be considered the most commercially prominent area of AI applications. Often, it is separated from the general term of AI systems.

• Other areas such as robotics, computer vision, natural language processing , speech recognition and machine learning are more prominent in research areas but yet limited in practice.

Differences between DSS, ES and AI

• This is best illustrated by an example. • Take an inventory system which determines when an

item should be re-ordered and the method used to accomplish it:– A DSS would collect sales and cost data and automatically apply

the chosen inventory searching method to monitor sales to send messages to suppliers when a re-order was needed.

– An expert system would help managers decide which inventory re-ordering method to use when asked for each product or store.

– An artificial intelligence system would determine the rules the expert system needs to make a decision. This would enable the manager to switch back and forth between inventory re-ordering methods whenever applicable.

Problems with artificial intelligence

Humans are significantly superior to computers in six areas:

1) Pattern recognition2) Performing multiple tasks at the same time3) Movement4) Speech recognition5) Vision6) Language comprehension

Of late, computer systems and tools have made great strides to close gap between humans and computers in some of these areas, such as speech recognition, there are still significant gaps in performance in others.

combining human and computer strengths

However, computers have their own strengths over human beings in other areas:

1) Speed

2) Accuracy

3) Memory

4) Storage capacity

5) Inter-connectivity

Information systems are all about how we make use of these strengths to our advantage.

Federal Express

• Founded by Fred Smith, an undergraduate at Yale University in 1971

• The idea was to provide overnight delivery of small, high-value items.

• World’s largest express transportation company by now.• Delivers 5 million items each business day to 211

countries worldwide• 44,000 posting stations worldwide• Processed 110 million electronic transactions a day• Employs 120,000 people worldwide• Operates 644 aircraft and more than 67,200 vehicles in

its integrated system• Technology has been integral to FedEx’s growth and

success. FedEx pioneered the first automated customer services center

Using technology

• Customers are willing to pay a premium for door-to-door service. FedEx had to pick, transport, and deliver packages to and from the most lucrative cities as efficiently as possible.

• FedEx developed a three-model management planning system to meet with the increased pressures. It used these models to make both ongoing operational decisions and crucial strategic decisions.

Three-model management planning system

• Origin-destination flow model: This model used an improved origin-destination flow approach to determine the what, when, and where of package volumes from and to actual and potential cities in the system.

• FLY model: This model produced schedules and determined resource requirements for selected cities. Using actual past volumes to review performance, this model tested other options and recalibrated its coefficients.

• Financial planning model: This model examined the overall economic and financial implications of alternative route structures and flying schedules.

More technology

• To have optimal margins, very high load factors is vital. FedEx reconfigured its route structure every month. It implemented schedule changes within a few days.

• To improve customer service, FedEx developed a reservation system. Customer calls were centralized at call centers. Call centers sent requests to dispatch centers in the cities served.

• FedEx established two hubs that ran in parallel to cope with growth. However, the debate of single-hub and multi-hub systems went on.

• In 1979, the massive, highly automated SuperHub system was implemented.

• The SuperHub and centralized call centers moved FedEx from a decentralized to a centralized structure with strict standards and few redundancies.

• From SuperHub to overlay hub: In an overlay hub system each pickup station makes a decision to send a package for re-distribution within the region by sending it to the regional hub or to send the package to the SuperHub.

and onto the net• As volume growth accelerated rapidly, FedEx enhanced

its system into a mainframe-based order and dispatching system called COSMOS (Customer, Operations, Service, Management Operating System)

• COSMOS keep track of every package through the entire FedEx system by using bar codes and scanning

• The growth of PCs had lead FedEx to use electronic commerce over the internet to capture customers and reduce costs.

• Fedex.com started in 1995 and expanded progressively. By 1997, the hits to the site already reach 280,000 per day.

• FedEx’s extranet, a secure communication and data exchange between internal and external users was established integrating the elements of both the intranet and internet.

other technology stories

• Significant investment in technology, including system of electronic data lines and hardware necessary to send and receive data across those lines, were made to provide a proprietary fax service called Zapmail.

• However, the rapid development of a single fax technology standard and the nearly instant price decline that made fax machine ubiquitous. Even small companies and individuals can afford to have their own machines which make FedEx fax service redundant.

• In 1996,FedEx terminated its development of a version of its FedEx Ship Software for Lotus Notes. As FedEx Ship for Notes required users to have the groupware Lotus Notes which become outdated.

services at customer sites

• IntraNetShip: a workgroup-enabled extranet application that links to customer intranets and automates packet tracking and authorization processes. IntraNetShip runs on customer servers and interfaces with fedex.com. The application centralizes policy management at user sites and standardizes authorization procedures. It represents an expansion of FedEX’s internet strategy, from web-based package tracking and other services to a model based on server applications at customer sites.

• FedEx PowerShip PassPort System: gives a customer corporation the secure means to efficiently meet the varied requirements of its busy shipping department. Designed to be integrated into customer’s computer network, this customized system delivers the power of FedEx's global IT network to customer’s shipping department.

other fedex.com services• FedEx Ship Manager at fedex.com: FedEx Ship Manager at

fedex.com gives customer the ability to ship and track from any computer with Internet access, without the need of any additional software.

• FedEx's eBusiness Tools are a series of web and Java-based systems that allow one to seamlessly manage inventory, on-line shipping, order processing, return management and other logistics operations.

• FedEx's eShipping Tools make use of the latest information technology to enable one to efficiently fulfill shipping requirements from desktops, saving both time and money.

• FedEx is beta testing new software that enable corporate customers to take a virtual look inside packages in transit to reveal their contents and value. The application establishes a central administrator who can distribute inventory, packing and shipping instructions to appropriate departments. Ultimately, not only the path of the package but also the contents and value of the package will be tracked.

the information business

"The information about a package is as important as the delivery of the package itself."

• FedEx chairman and founder Fred Smith had that vision in 1979, and it remains the heart and soul of the FedEx technology story. It's not about bits and bytes, but about delivering information, and it has revolutionized the way business is conducted in a global economy.

• FedEx Corporation is a world leader in technology, setting the industry standard for efficiency and customer service. Its technological advances have always been in response to customers' needs, anticipated future requests and the demands of an information-driven environment.

teaching and research

• Construction is in progress on the FedEx Technology Institute at the University of Memphis, a state-of-the-art facility designed to house an educational endeavor teaching the newest technologies using the most advanced learning techniques. (http://fedex.memphis.edu)

• The facility will give faculty and students throughout the university access to cutting-edge information technology for learning and research. The primary objective is to provide an environment that produces graduates prepared for employment in the rapidly changing world of the Internet and information technologies.

• FedEx Center of Cycle Time Research (under construction) (http://www.people.memphis.edu/~cctr)

Recommendations for the future• Continue to focus on customer service thru website

development.• Better integration of data for internal and external

customers will continue to result in increased cost savings.

• FedEx’s business proved to be very profitable, however the airfreight industry has very low margins. The inventory management and logistics businesses have wider margins. Expanding in this market will enable FedEx to better utilize its fixed assets.

• The outsourcing of corporate warehousing, ordering, and shipping functions will provide a growing market for FedEx to capture more revenues and improve profit margins.

• The international market is growing at about twice the rate of the domestic market, FedEx should continue to invest in its international operations.

resources & reading materials

Chapters 8, 9 and 10 of textbooks

• http://www.fedex.com

• http://fedex.memphis.edu

• http://www.people.memphis.edu/~cctr