Simulation

Simulation

Simulation

A tool for the study of the behavior of a system under

various conditions.
The goal in simulation is to create a model that will
reflect the behavior of some real-life system in order to
be able to observe how it may behave when certain
inputs or parameters are changed.
Unlike analytical techniques, it is not an optimizing
technique.

Steps in Simulation
Define the
problem
Set objectives
Develop model
Gather data
Validate model
Design
experiments
Run simulations
Analyze and
interpret results

The Monte Carlo Method

Monte Carlo Simulation

A commonly used approach for achieving randomness

that derives its name from its similarity to games of
chance.

Characteristics of random numbers

All numbers are equally likely.

No patterns appear in sequences of numbers.

Random Numbers

Simulating a Coin Toss

Parts demand Example

Demand

Frequency

Probability

60

.6

15

.15

10

.1

.04

.01

100

Parts demand Example

Example 1

Example 1

Example 1

Example 2

Example 2

Example 2

Example 3

Example 3

Example 4

Example 4

Example 4

Advantages of Simulation
1. It is particularly well-suited for problems that are difficult
or impossible to solve mathematically.
2. It allows an analyst or decision maker to experiment
with system behavior in a controlled environment
instead of in a real-life setting that has inherent risks.

3. It enables a decision maker to compress time in order

to evaluate the long-term effects of various alternatives.
4. It can serve as a mode for training decision makers by
enabling them to observe the behavior of a system
under different conditions.

Limitations of Simulation
Probabilistic simulation results are approximations,
rather than optimal solutions.

Good simulations can be costly and time-consuming to

develop properly; they also can be time-consuming to
run, especially in cases in which a large number of
trials are indicated.
A certain amount of expertise is required in order to
design a good simulation, and this may not be readily
available.
Analytical techniques may be available that can
provide better answers to problems.

Simulation example

Risk analysis- Porta Com Project- page 539

Inventory simulation
Waiting line simulation

Risk Analysis

It is a process of predicting the outcome of the

decision in the face of uncertainty.
ABC Company is dealing with Printers
Preliminary analysis presents following data:
Selling Price = $249 Per unit
Administrative Cost = $400, 000
Advertising Cost
= $600, 000

Profit = (249 Labour Cost Parts Cost) * Demand

Admin - Adv
Cost such as labour cost, cost of parts and first year
demand and not known

Risk Analysis

Let c1 be the cost of labour, c2 be the cost of

parts and x be the demand.
On an average industry data is

The following three scenarios are given by Mgt based

on past data
Cost of Labor
Cost of Parts

First Year Demand

profit

Best Case

base Case

Worst Case

80

90

100

43

28,500

2,591,000

45

15,000

710,000

47

1,500

-847,000

Risk Analysis by Simulation

Labor Cost follows a discrete probability distribution as

presented in table below
Direct Labor Cost Per unit
$43
$44
$45
$46
$47

Probability
0.1
0.2
0.4
0.2
0.1

Parts Cost minimum is 80 and max is 100 and follows a

uniform distribution.
Part cost = a + r(b - a)
(r = random number, a = smallest Value, b = largest value)
Part cost = 80 + r(100 - 80) = 80 + 20r

 Demand is described by normal probability

distribution the mean is 15000 units and the SD
is 4500.
Excel Function NORMINV(Rand(), Mean, SD)
Demand = NORMINV (Rand(),15000, 4500)

Inventory Simulation

Inventory policy for a retailer for the product that

has uncertain demand
Product is fan
Cost = 75, Selling price = 125, Profit = 50
Monthly demand of the product is normally distributed
with mean of 100 and SD of 20.
Retailer receives delivery by the distributor who
replenishes the inventory level of Q at the begning of
each month. If Monthly demand is less than
replenishment level inventory holding cost of $15
occurs. If Monthly demand is greater than
replenishment level shortage occurs. Retailer assigns
$30 cost for each customer turned away.

 Case 1: Demand (D) <= Replenishment Level (Q)

Gross Profit = 50D
Holding Cost = 15 (Q - D)
NET Profit = Gross Profit Holding Cost
= 50 D 15 (Q-D)

Case 2: Demand (D) > Replenishment Level (Q)

Gross Profit = 50Q
shortage Cost = 30 (D - Q)

NET Profit = Gross Profit shortage Cost

= 50 D 30 (D - Q)

STEPS IN SIMULATION
Set Model Parameters
Select a Replenishment Level (Q)
Generate Monthly Demand (D)

If D <= Q then NET Profit = Gross Profit Holding Cost

ELSE NET Profit = Gross Profit shortage Cost

Waiting line simulation

Static Simulation Models: Independent trials the

result of one trial does not impact the other trial.
Simulation models that take into account how
the system changes or evolve over time are
referred as dynamic simulation models.
Where arrival and departures of customers are
events that occur at discrete points in time the
simulation model is also called discrete event
simulation.

Customer arrival time

Inter arrival time between two successive

arrivals.
Inter arrival time = a + r (b - a)
r random number between 0 and 5, a=min inter
arrival time and b = max inter arrival time.
Inter arrival time = 0 + r (5 - 0) = 5r
past data indicates that the ATM Service time
follows normal probability distribution with a
mean of 2 and SD of 0.5.