Modelling & Simulation

Supply Chain Management

Excel Based Simulation Problems
1. Grocery Store: Single Server Queue
A small grocery store has only one check out counter. Customers arrive at this checkout
counter at random times that are from 1 to 8 minutes apart. Each possible value of inter
arrival time has the same probability of occurrence. The service times vary from 1 to 6
minutes. The probability of occurrences of each possible service time is given below:
Service Time
Mins

Probability

1
2
3
4
5
6

0.1
0.2
0.3
0.25
0.1
0.05

The problem is to simulate the system first on paper for only twenty arrivals with the help
of the random numbers given in the following table:
Random numbers for
Arrivals
Service
0.674
0.908
0.846
0.434
0.809
0.955
0.220
0.521
0.351
0.008
0.138
0.788
0.824
0.714
0.283
0.304
0.399
0.759
0.746
0.910
0.477
0.911
0.498
0.783
0.629
0.900
0.360
0.873
0.721
0.056
0.525
0.829
0.610
0.070
0.758
0.796
0.681
0.425
Excel Based Simulation

0.127

0.014

Then create the model with Excel and find following characteristics for the queue for 100
customers and match answers:
1
2
3
4
5
6
7
8

Average waiting time for customer in Queue

Probability (wait)
Probability of idle server
Server busy
Average service time
Average time between arrival
Average waiting time for those who wait
Average time customer spends in system

1.74 mins
0.46
0.24
0.76
3.17 mins
4.19 mins
3.22 mins
4.91 mins

2. Able Baker Call Centre Problem: Two server queue

Consider a computer technical support centre where personnel take calls and provide
service. The time between calls ranges from 1 to 4 minutes, with distribution shown in
the table below:
Time between arrival
Mins

Probability

1
2
3
4

0.25
0.4
0.2
0.15

There are two technical support people Able and Baker. Able is more experienced and
can provide service faster than Baker. The distribution of their service times are shown
below:
Service Time of Baker
Mins

Probability

3
4
5
6

0.35
0.25
0.20
0.20

Excel Based Simulation

Times are usually a continuous measure. But for this and other time based examples we
make them discrete for ease of explanation.
Able and Baker have reached an understanding that Able gets the call if both technical
support people are idle because Able has seniority.
The problem is to find out how well the system is working. To estimate first find the
following characteristics of the queue system by simulating for 20 customers (using the
random numbers given in the table below) and then write an Excel based model for 100
customers and compare answers given in the last column:
1
2
3
4
5
6
7
8
9

Average wait time

Probability that a customer has to wait in Q
Probability of idle time of Able
Probability of idle time of Baker
Average service time of Able
Average service time of Baker
Average time between arrival
Average wait time for those who wait
Average time in the system

0.000
0.000
0.222
-0.031
3.857
5.417
2.440
2.538

3. Higher Education Fair

At a higher education fair more than 2000 students are likely to turn up. A leading private
management institute from USA has set up a stall and deputed two executives to attend to
admission related queries raised by students. One of the executives Samantha is very
senior and the other executive George is only with couple of years of experience.
Between them they have decided that if both are free, the next query will be handled by
Samantha because she is senior and possibly provide correct answers to almost all
questions. She is also bit faster than George.
The inter arrival distribution of queries from admission seekers are given in the following
table:
Time between
arrivals (Mins)
1
2
3
4

Probability
0.25
0.40
0.20
0.15

The service distribution times for Samantha & George are given below:
Samantha
Service
Time
Probability
(Mins)
1
0.20

Excel Based Simulation

George
Service
Time
(Mins)
4

Probability
0.40

2
3
4

0.40
0.25
0.15

5
6
7

0.30
0.20
0.10

The problem is to find how well the arrangement will work? To estimate the system
measures of performance, a simulation of first ten admission seekers is made by using
following sets of random numbers for arrival of students with queries and service times
for Samantha and George.
Random Numbers for
Arrival
Service
Service
of
Times for
Times for
students Samantha
George
21
7
95
52
65
53
42
69
49
34
21
94
83
40
52
62
47
31
54
18
9
54
20
11
90
72
92
15
74
8
It was decided that the system will be implemented only if both criteria are satisfied:
1. Average time for the students in the system is less than 6 minutes.
2. Average waiting time for those students who wait is less than 5 minutes.
What is your recommendation?
4. News Vendor Model
The problem of purchase and sale of newspaper is that the number of papers to be bought
has to be decided in the morning. There is no opportunity of buying a second lot after
assessing the days demand. Such a newsstand owner Rampukar buys news paper at Rs.
1.50 and sells for Rs. 2.50. News Papers not sold at the end of the day are disposed off at
the rate of Rs. 4.00 for 20 news paper. News paper can be purchased in bundles of 10.
Thus Rampukar can buy 50, 60, 70 papers and so on. There are three types of news
days: Good, Fair and Poor; they have the probability of occurrences as 0.30, 0.50 and
0.20. The distribution of demand is given in the following table
Demand
40
50
60
70
80
90
100
Excel Based Simulation

Good
0.03
0.05
0.15
0.20
0.35
0.15
0.07
4

Fair
0.10
0.18
0.40
0.20
0.08
0.04
0.00

Poor
0.44
0.22
0.16
0.12
0.00
0.00
0.00

The news stand boy Rampukar had decided to buy 60 news papers daily. By using the
allocated random numbers as given below, calculate the daily average profit for twenty
days.
Random Number for
Type of News days Demand
98
70
91
45
91
57
57
49
86
37
60
52
79
50
34
92
29
59
15
62

99
63
16
29
3
38
90
76
61
16
2
6
27
7
41
2
74
19
5
95

5. Reliability Problem
A milling machine has three different bearings that fail in service. The distribution of the
life of each bearing is identical, as shown in the table. When a bearing fails, the mill
stops, a repairperson is called and a new bearing is installed. The delay time of the repair
persons arriving at the milling machine is also a random variable having the distribution
given in second table. Down time of the mill is estimated at $ 10 per minute. The direct
on-site cost of the repair person is $ 30 per hour. It takes 20 minutes to change one
bearing, 30 minutes to change two bearings, and 40 minutes to change three bearings. A
proposal has been made to replace all three bearings whenever a bearing fails.
Management needs an evaluation of the proposal. The total cost per 10,000 bearing-hours
will be used as the measure of performance.

Excel Based Simulation

Bearing Life Distribution

Bearing Life
Probability of
(Hours)
faliure
1000
0.10
1100
0.13
1200
0.25
1300
0.13
1400
0.09
1500
0.12
1600
0.02
1700
0.06
1800
0.05
1900
0.05
Delay Time Distribution
Delay Time
Probability
(minutes)
5
0.6
10
0.3
15
0.1
Inventory Replenishment
Continuous Review Q Type
6. Uncertain Demand but Fixed Lead Time
Using following data build an Excel based simulation model to compute minimum
total cost for fifty periods:

Average weekly demand = 400 units

Standard Deviation of the weekly demand = 15 units
Delivery lead time = 4 weeks
Cycle Service Level 95% (Z value 1.65)
Product cost = Rs. 500
Annual Carrying cost = 20%
Cost of placing order = Rs. 490
Out of stock cost = Rs. 20

Assume opening stock to be 1390 units. The manager has assumed that the opening
stock would be between 0 and 1600 and the ordering cost would be between 0 and
Rs.700. Calculate total cost for fifty periods. Optimise it by varying opening stock
and ordering cost.
(Answer: Opening stock 1556, Ordering cost Rs. 684 and the Optimised total cost is
Rs.94326)
Excel Based Simulation

7. Uncertain Demand and Variable Lead Time

Using following data build an Excel based simulation model to compute minimum
total cost for fifty periods:

Average weekly demand = 400 units

Standard Deviation of the weekly demand = 15 units
Delivery lead time = 4 weeks
Standard deviation of the lead time = 2 weeks
Cycle Service Level 95% (Z value 1.65)
Product cost = Rs. 500
Annual Carrying cost = 20%
Cost of placing order = Rs. 500
Out of stock cost = Rs. 20

Assume opening stock to be 1800 units. Management expects that the opening
inventory will lie between 1400 and 0. Similarly the ordering cost will be between
0 and Rs. 500) Calculate total cost for fifty periods. Optimise it by varying
opening stock and ordering cost.
(Answer: Opening stock 1398, Ordering cost Rs. 468 and the Optimised total cost
is Rs.47102)
8. Fixed Period Review P Type
Using following data build an Excel based simulation model to compute minimum
total cost for sixty one day in March and April:

Average daily demand = 20 units

Standard Deviation of the daily demand = 6 units
Delivery lead time = 3 days
Review period = 7 days (Every Saturday)
Cycle Service Level 95% (Z value 1.65)
Product cost = Rs. 500
Daily Carrying cost = Rs. 1
Cost of placing order = Rs. 150

Assume opening stock to be 100 units. Calculate total cost for sixty one days.
Management feels that the cost of placing each order should be between Rs. 150
and Rs. 700. The management is also willing to start with an opening inventory
between 0 and 150 units. Optimise it by varying opening stock and ordering cost.
(Answer: Opening stock 72, Ordering cost Rs. 150 and the total cost is Rs. 7124)

Excel Based Simulation

9. Forecasting High, Medium & Low demand

A firm makes two types of gents shirts Designer and Standard. The selling price for
designer is Rs. 500 and that of standard is Rs. 200. The per unit costs are Rs. 90 and
Rs. 85 respectively. The firm does not carry stock for more than a year. It sells off the
old stock and recovers Rs. 30 for each designer and Rs. 20 for each standard shirt.
The demand for the shirts is equally distributed between high, medium and low. Mean
and the standard deviation of the three levels of demands are given below:

Type of Shirt
Designer
Standard

High
Demand
Mean
2000
5000

Medium
Demand
Mean
900
1500

Low
Demand
Mean
300
800

Demand
Std Dev
100
250

Marketing department predicts that not more 1200 designer shirts should be
produced but at least 2000 units of standard shirts should be made available.
Develop a forecasting model for 50 demand states and estimate maximum
average profit. Assume that there is no penalty for lost sales.
(Answer: Order 1089 designer shirts, 2000 standard shirts to make maximum
profit of Rs. 959848 for 50 states of demand)
10. Forecasting Random demand
A firm makes two types of gents shirts Designer and Standard. The selling price
for designer is Rs. 2500 and that of standard is Rs. 800. The per unit costs are Rs.
1900 and Rs. 285 respectively. The firm does not carry stock for more than a year.
It sells off the old stock and recovers Rs. 830 for each designer and Rs. 140 for
each standard shirt. The demand for the shirts is random Mean and the standard
deviation of the demand are given below:
Type of Shirt

Mean Demand

SD of Demand

Designer
Standard

600
1000

160
170

Marketing department predicts that not more 800 designer shirts should be
produced but at least 2000 units of standard shirts should be made available.
Develop a forecasting model for 500 demand states and estimate maximum
average profit. Assume that there is no penalty for lost sales.
(Answer: Order 800 designer shirts, 2926 standard shirts to make maximum profit
of Rs. 351777 for 500 states of demand)
11. Aggregate Planning Chase

Excel Based Simulation

A firm produces a product that has six months demand cycle as shown in the table below:

January

February

March

April

May

June

Demand
Forecast

500

500

600

300

200

100

Workdays

22

19

21

21

22

20

Work
Hours @
8 per day

176

152

168

168

176

160

Each unit requires 10 worker hours to produce, at a labour cost of Rs. 6 per hour regular
rate (or Rs. 9 per hour over time rate). The idle time of a worker costs the company a sum
of Rs.2 per hour. There are currently 22 workers employed in the subject department. The
hiring and training cost per worker is Rs. 400 per person. The layoff cost is Rs. 600 per
person. The company policy is to have 10% of the demand forecast as the safety stock
that becomes the beginning inventory for the next month. There are currently 100 units in
the stock. The inventory carrying cost per unit per month is Rs. 2 only. Unit shortage or
stock outs have been assigned a cost of Rs. 6 per unit per month.
Calculate the cost of the aggregate plan if the firm decides to vary workforce size to
accommodate demand.

12. Aggregate Planning Level

Prakash Industries produces a product that has six months demand cycle as shown in the
table below:

January February

March

April

May

June

Demand
Forecast

300

500

400

100

200

300

Workdays

22

19

21

21

22

20

Work
Hours @
8 per day

176

152

168

168

176

160

Each unit requires 10 worker hours to produce, at a labour cost of Rs. 6 per hour regular
rate (or Rs. 9 per hour over time rate). The total cost per unit is estimated to be Rs. 200
but the units can be subcontracted at a cost of Rs. 208 per unit. There are currently 20
workers employed in the subject department. The hiring and training cost per worker is
Rs. 300 per person. The layoff cost is Rs. 400 per person. The company policy is to have
20% of the demand forecast as the safety stock that becomes the beginning inventory for
the next month. There are currently 50 units in the stock. The inventory carrying cost per
unit per month is Rs. 2 only. Unit shortage or stock outs have been assigned a cost of Rs.
20 per unit per month.

Excel Based Simulation

The firm must begin January with the 50 units on hand.

Calculate the cost of the aggregate plan if the firm decides to maintain constant work
force of 20, and build inventory or incur stock out cost.

13. Seasonal Demand and discounted price End of the season sale of sweater
A large departmental store plans to sell sweaters in its winter catalogue for $150
each. The manager expects demand to be normally distributed with mean 3000
units and standard deviation of 1000 units. Toward the end of the winter season
the store sends out a sales catalogue with discounted prices on unsold items. The
discounted price determines the demand in response to the sales catalogue. The
manager anticipates that the sales catalogue will generate demand for sweaters
with a mean of (1000 5p) and a standard deviation of (1000 5p)/3, where p is
the discounted price charged. Any left over sweater after the sales catalogue are
donated to charity. Each sweater costs the store $50. Thus the donation to the
charity fetches $25 in tax benefits. The store incurs a cost of $5 per unsold
sweater to store and transport them to the charity, resulting in a salvage value of
$20 per sweater sent to charity. The manager has decided to charge a discount
price of max [$25, ($150 n/20)], where n is the number of sweaters left over
after the winter catalogue sale. The manager would like to identify the number of
sweaters that should be purchased at the start of the winter season.
(Answer: 3000 sweater ordered, For 100 demand states Average number os
sweaters discounted is 497, Average number donated to charity is 254, Average
profit is 253007 and standard deviation of profit is 75435)
14. Seasonal Demand and discounted price Hotel Rooms
Problem 1
Consider an exclusive resort with 400 identical rooms. Full price of these rooms per
night is Rs. 2000. Management is forecasting on pricing rooms for the next five-day
holiday. The goal is to price rooms so as to maximise revenue. Based on past
experience, management estimates the relationship between demand, D, and the price,
p, by the linear function
D = 1000 0.5p
The standard deviation of this demand is estimated to be SD = (1000 0.5p)/4
This implies that when the price is 1600, there is demand for 200 rooms, while if the
price is 1200, there is demand for 400 rooms.
It is also assumed that the demand at the higher rate is randomly distributed with
mean of 200 rooms and standard deviation of 60 rooms. To maximise revenue
management would like to sell maximum rooms at the higher rate and then book at
the maximum discounted rate of 1200 at which all the 400 rooms can be booked.
(Answer: Book 206 rooms at 1588 to maximise revenue of Rs. 559,933)

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10

Problem 2
Consider a Hotel with 400 identical rooms. Full price of these rooms per night is Rs.
2000. Management is forecasting on pricing rooms for the next holiday season. The
goal is to book rooms so as to maximise revenue. Based on past experience,
management estimates that there is demand for all the 400 rooms at the discounted
rate of Rs. 1200 per room. Management is considering two higher rates of Rs. 1600
and Rs. 1800. It is estimated that the mean demand at Rs. 1600 is of 200 rooms with
standard deviation of 10 rooms. Similarly, the mean demand at Rs. 1800 per night is
50 rooms with standard deviation of 5 rooms.
To maximise revenue management would like to sell maximum rooms at the higher
rates and then book at the maximum discounted rate of 1200 at which all the 400
rooms can be booked.
(Answer: Book 50 rooms at Rs. 1800; 198 rooms at Rs. 1600; 151 rooms at Rs. 1200
yielding maximum revenue of Rs. 311,909)
15. Transportation and Trans-shipment Models
Capacitated Plant Location Model: Sun Oil is a manufacturer of petrochemical
products with worldwide sales. The Vice President of Supply Chain is considering several
alternatives to meet demand. One alternative is to set up plants in each region
advantages are lower transportation costs and avoidance of import duties but the
disadvantages are not able to fully exploit economies of scale (plant will be sized to meet
the local demand). Other alternative is to consolidate plants in few regions this will
improve economies of scale but would increase transportation costs and import duties.
Annual demands for each of the five regions are displayed below:

Cost and Demand Data for Sun Oil

Inputs - Costs, Capacities, Demands
Demand Region - Production & transportation costs per 1,000,000 units

Supply Region

Fixed
Cost

Low
Capacity

Fixed
Cost

High
Capacity

N. America

S. America

Europe

Asia

Africa

N. America

81

92

101

130

115

6000

10

9000

20

S. America

117

77

108

98

100

4500

10

6750

20

Europe

102

105

95

119

111

6500

10

9750

20

Asia

115

125

90

59

74

4100

10

6150

20

Africa

142

100

103

105

71

4000

10

6000

20

Demand

12

14

16

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11

Variable production, inventory and transportation costs are shown above. For example
it costs $ 92,000 to produce one million units in North America and sell them in
South America. Sun Oil is considering two different plant sizes in each location. Low
capacity plants can produce 10 million units per year where as high capacity plants
can produce 20 million units. Fixed costs for setting up low and high capacity plants
at each of the locations are also displayed.
The Vice President would like to know what the low cost network would look like.
Network Optimization Models: Both TelecomOne and HighOptic are manufacturers of
fibre optic telecommunication equipment. TelecomOne has focused on the eastern half of
the United States. It has manufacturing plants located in Baltimore, Memphis, and
Wichita and serves markets in Atlanta, Boston, and Chicago. HighOptic has targeted the
western half of the United States and serves markets in Denver, Omaha and Portland.
HighOptic has plants located in Cheyenne and Salt Lake City.
Plant capacities, market demand, variable production and transportation cost per
thousand units shipped, and fixed costs per month at each plant are shown below:

Decision Variables for TelecomOptic

Inputs - Costs, Capacities, Demands
Demand Region - Production & transportation costs per 1,000 units (Thousand $)
Atlanta

Boston

Chicago

Denver

Omaha

Portland

Monthly
Capacity
Thousand
Units

Baltimore

1675

400

685

1630

1160

2800

18

7650

Memphis

380

1355

543

1045

665

2321

22

4100

Witchia

922

1646

700

508

311

1797

31

2200

Hi -Salt Lake City

1925

2400

1425

500

950

800

27

5000

Hi -Cheyenne

1460

1940

970

100

495

1200

24

3500

10

14

11

Supply Region

Demand

Monthly
fixed cost
Thousand
$

Management at both TelecomOne and HighOptic has decided to merge the two
companies into a single entity to called TelecomOptic. Management feels that
significant benefits will result if the two networks are merged appropriately.
TelecomOptic will have five factories from which to serve six markets. Management
is debating whether all five factories are needed. They have assigned a supply chain

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12

team to study the network of combined company and identify the plants that should
be shut down. Help them in making this decision.
Network Optimization Models: Deciding Plants and Warehouses together: Consider
the following distribution system:

Single product

Two plants, referred to as P1 and P2

Plant P2 has an annual capacity of 60,000 units

The two plants have the same production costs

Two existing warehouses, referred to as W1 and W2, have identical

warehouse handling costs

Three market areas: C1, C2 and C3, with demands of 50,000, 100,000 and
50,000 units respectively

Following table provides distribution cost per unit. For instance, distributing one
unit from plant P1 to warehouse W2 costs $5.

Distribution costs per unit

Facility

P1

P2

C1

C2

C3

W1

W2

Warehouse

Companys objective is to find a distribution strategy that specifies the flow of

products from the suppliers through the warehouses to the market areas without
violating the plant P2 production capacity constraint that satisfies market
demands, and minimizes the total distribution costs.
16. Supplier Relationship
(a) Retailer of woollen Garments
A retailer is contemplating to place order for the woollen garments for children for the
next winter season. To avail bulk discount the retailer plans to order once for the
entire season which lasts for barely three months. The average selling price of a
particular type of garment sold is Rs. 150 per unit. The wholesale price paid by the
retailer to the concerned manufacturer is Rs. 100 per unit. Instead of undergoing the
hassles of storing woolen garments during off season and also to avoid the risk of
fashion change and damage, the retailer prefers to dispose off unsold stock at the end
of the season at a discount store at Rs. 20 per unit. The manufacturer incurs fixed

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13

production cost of Rs. 50000 and the variable production cost per unit is Rs. 70. All
other costs are not considered.
From the past experience the retailer estimates that the demand to be
Sr.
No.

Demand in
units

Probability

1.

1000

0.20

2.

2000

0.20

3.

3000

0.30

4.

5000

0.30

If the retailer has decided to order 4000 units of garments, determine which
supply contract out of the following two is most beneficial to both retailer and
manufacturer:
(1) Buyback Contract: Manufacturer offers to buy back the unsold garments
from retailer for Rs. 35 per unit
(2) Revenue Sharing Contract: Manufacturer and retail have a revenue sharing
arrangement in which the manufacturer agrees to decrease the wholesale
price from Rs. 100 to Rs. 80 per unit and in return, the retailer provides ten
percent of the product revenue to the manufacturer.
(b) Swimsuit: Sporting Goods Manufacturer
Consider a company that designs, produces and sells summer fashion items such
as swimsuits. About six months before summer, the company must commit itself
to specific production quantities for all its products. Since there is no clear
indication of how the market will respond to new designs, the company needs to
use various tools to predict demand for each design and plan production and
supply accordingly. In such settings the trade off are clear: overestimating
customer demand will result in unsold inventory while underestimating customer
demand will lead to inventory stock outs and loss of potential customers.
Based on past sales, knowledge of the industry, and economic conditions, the
marketing department has developed a probabilistic forecast as follows:

Excel Based Simulation

Demand

Probability

8000

0.110

10000

0.110

12000

0.275

14000

0.225

14

16000

0.185

18000

0.095

Average

13100

The forecast averages about 13,000, but there is a chance that demand will be
greater or less than this.
Additional information available:
Production cost per unit (C): $80
Selling price per unit (S): $125
Salvage value per unit (V): $20
Fixed production cost (F): $100,000
(1) If there is no opening inventory, how much is the estimated profit if 9000
units are produced? If 16000 units are produced?
(2) Effect of opening inventory: Calculate the production lot that will
maximize profit if there are 5000 units as beginning inventory? If 10000
units are there as beginning inventory? Determine the level of opening
inventory at which the company should produce nothing more?
Consider the same swimsuit example. This time we assume that there are two
companies involved in the supply chain: a retailer who faces customer demand
and a manufacturer who produces and sells swimsuits to the retailer.
Sequential Optimization: Extra information available: The variable cost of
production per unit equals $ 35. How much should the retailer order from the
manufacturer?
Buyback Contract: Suppose the manufacturer offers to buy unsold swimsuits
from the retailer for $55. Estimate the total supply chain profit (sum of retailer
and manufacturer profits) if the retailer places orders for 12000, 14000 or 16000
units. How much will be the increase in total profit with respect to the earlier case
of sequential optimization?
Revenue Sharing Contract: Suppose the manufacturer and retailer have revenue
sharing contract. The manufacturer agrees to decrease the wholesale price from
$80 to $60, and, in return, the retailer provides 15 percent of the product revenue
to the manufacturer. Estimate the share of total supply chain profit if the retailer
orders for 14000 units in this case.
To this list add problems listed in the book Supply Chain Modeling by J. Shapiro.

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