What is Monte Carlo Simulation?

Monte Carlo simulation, or probability simulation, is a technique used to understand the impact of risk and uncertainty in financial, project management, cost, and other forecasting models. Monte Carlo methods (or Monte Carlo experiments) are a class of computational algorithms that rely on repeated random sampling to compute their results. These methods are often used in computer simulations of physical and mathematical systems. These methods are most suited to calculation by a computer and tend to be used when it is infeasible to compute an exact result with a deterministic algorithm. This method is also used to complement theoretical derivations.

STEPS INVOLVED :
Step A. Construct a simulated universe of cards or dice or some other randomizing mechanism whose composition is similar to the universe whose behavior we wish to describe and investigate. The term universe refers to the system that is relevant for a single simple event. Step B. Specify the procedure that produces a pseudo-sample which simulates the real-life sample in which we are interested. That is, specify the procedural rules by which the sample is drawn from the simulated universe. These rules must correspond to the behavior of the real universe in which you are interested. To put it another way, the simulation procedure must produce simple experimental events with the same probabilities that the simple events have in the real world. Step C. If several simple events must be combined into a composite event, and if the composite event was not described in the procedure in step B, describe it now. Step D. Calculate the probability of interest from the tabulation of outcomes of the resampling trials.

Applications :

1.Physical sciences 2.Engineering 3.Computational biology 4.Applied statistic 5.Games

An Introduction to Operations Research

The term Operations Research (OR) describes the discipline that is focused on the application of information technology for informed decision-making. In other words, OR represents the study of optimal resource allocation. The goal of OR is to provide rational bases for decision making by seeking to understand and structure complex situations, and to utilize this understanding to predict system behavior and improve system performance. Much of the actual work is conducted by using analytical and numerical techniques to develop and manipulate mathematical models of organizational systems that are composed of people, machines, and procedures.

ORs role in both, the public and the private sectors is increasing rapidly. In general, OR addresses a wide variety of issues in transportation, inventory planning, production planning, communication operations, computer operations, financial assets, risk management, revenue management, and many other fields where improving business productivity is paramount. In the public sector, OR studies may focus on energy policy, defense, health care, water resource planning, design and operation of urban emergency systems, or criminal justice. , hence some of the benefits offered by OR include: Decrease Cost or Investment Increase Revenue or Return on Investment Increase Market Share Manage and Reduce Risk Improve Quality

OR Functions and Methods

OR may assist decision-makers in almost any management function. To illustrate, OR supports the key decision making process, allows to solve urgent problems, can be utilized to design improved multistep operations (processes), setup

policies, supports the planning and forecasting steps, and measures actual results. OR can be applied at the non-manager levels as well, as engineers or consumers alike can benefit from the improved and streamlined decision-making process.

Despite the wealth of labels available in the filed of OR, most projects apply one of three broad groups of methods, which may be described as:

Simulation methods, where the goal is to develop simulators that provide the decision-maker with the ability to conduct sensitivity studies to (1) search for improvements, and (2) to test and benchmark the improvement ideas that are being made. Optimization methods, where the goal is to enable the decision maker to search among possible choices in an efficient and effective manner, in environments where thousands or millions of choices may actually be feasible, or where some of the comparing choices are rather complex. The ultimate goal is to identify and locate the very best choice based on certain criterias. Data-analysis methods, where the goal is to aid the decision-maker in detecting actual patterns and inter-connections in the data set. This method is rather useful in numerous applications including forecasting and data mining based business environments. Within each of the three basic groups, many probabilistic methods provide the ability to assess risk and uncertainty factors.

SCOPE OF OPERATIONS RESEARCH:

As presented in the earlier paragraphs, the scope of OR is not only confined to any specific agency like defence services but today it is widely used in all industrial organisations. It can be used to find the best solution to any problem be it simple

or complex. It is useful in every field of human activities, where optimisation of resources is required in the best way. (i) National Planning and Budgeting OR is used for the preparation of Five Year Plans, annual budgets, forecasting of income and expenditure, scheduling of major projects of national importance, estimation of GNP, GDP, population, employment and generation of agriculture yields etc. (ii) Defence Services Basically formulation of OR started from USA army, so it has wide application in the areas such as: development of new technology, optimization of cost and time, tender evaluation, setting and layouts of defence projects, assessment of Threat analysis, strategy of battle, effective maintenance and replacement of equipment, inventory control, transportation and supply depots etc. (iii) Industrial Establishment and Private Sector Units OR can be effectively used in plant location and setting finance planning, product and process planning, facility planning and construction, production planning and control, purchasing, maintenance management and personnel management etc. (iv) R & D and Engineering Research and development being the heart of technological growth, OR has wide scope for and can be applied in technology forecasting and evaluation, technology and project management, preparation of tender and negotiation, value engineering, work/method study and so on. (v) Agriculture and Irrigation In the area of agriculture and irrigation also OR can be useful for project management, construction of major dams at minimum cost, optimum allocation of supply and collection points for fertilizer/seeds and agriculture outputs and optimum mix of fertilizers for better yield. (vi) Education and Training OR can be used for obtaining optimum number of schools with their locations, optimum mix of students/teacher student ratio, optimum financial outlay and other relevant information in training of graduates to meet out the national requirements.

Limitations:
Dependence on an Electronic Computer: O.R. techniques try to find out an optimal solution taking into account all the factors. In the modern society, these factors are enormous and expressing them in quantity and establishing relationships among these require voluminous calculations that can only be handled by computers. Non-Quantifiable Factors: O.R. techniques provide a solution only when all the elements related to a problem can be quantified. All relevant variables do not lend themselves to quantification. Factors that cannot be quantified find no place in O.R. models. Distance between Manager and Operations Researcher: O.R. being specialist's job requires a mathematician or a statistician, who might not be aware of the business problems. Similarly, a manager fails to understand the complex working of O.R. Thus, there is a gap between the two. Money and Time Costs: When the basic data are subjected to frequent changes, incorporating them into the O.R. models is a costly affair. Moreover, a fairly good solution at present may be more desirable than a perfect O.R. solution available after sometime. Implementation: Implementation of decisions is a delicate task. It must take into account the complexities of human relations and behaviour In the first place, there is the sheer magnitude of the mathematical and computing aspects. The number of variables and interrelationships in many managerial problems, plus the complexities of human relationships and reactions, calls for a higher order of mathematics than nuclear physics does. In the second place, although probabilities and approximations are being substituted for unknown quantities and although scientific method can assign values to factors that could never be measured before, a major portion of important managerial decisions still involves qualitative factors. Until these can be measured, operations research will have limited usefulness in these areas, and decisions will continue to be based on non-quantitative judgments. Related to the fact that many management decisions involve un-measurable factors is the lack of information needed to make operations research useful in practice. In conceptualizing a problem area and constructing a mathematical model to represent it, people discover variables about which they need information that is not now available. To improve this situation, persons interested in the practical applications of operations research should place far more emphasis on developing this required information

Linear programming (LP, or linear optimization)

Is a mathematical method for determining a way to achieve the best outcome (such as maximum profit or lowest cost) in a given mathematical model for some list of requirements represented as linear relationships. Linear programming is a specific case of mathematical programming (mathematical optimization). More formally, linear programming is a technique for the optimization of a linear objective function, subject to linear equality and linear inequality constraints. A linear programming algorithm finds a point in the polyhedron where this function has the smallest (or largest) value if such point exists. Linear programming is the process of taking various linear inequalities relating to some situation, and finding the "best" value obtainable . The general process for solving linear-programming exercises is to graph the inequalities (called the "constraints") to form a walled-off area on the x,y-plane (called the "feasibility region"). Then you figure out the coordinates of the corners of this feasibility region (that is, you find the intersection points of the various pairs of lines), and test these corner points in the formula (called the "optimization equation") for which you're trying to find the highest or lowest value.

Linear programs are problems that can be expressed in canonical form:

where x represents the vector of variables (to be determined), c and b are vectors of (known) coefficients and A is a (known) matrix of coefficients. The expression to be maximized or minimized is called the objective function (cTx in this case).. Linear programming is used in business and economics, but also be utilized for some engineering problems. Industries that use linear programming models include transportation, energy, telecommunications, and manufacturing.

Sensitivity analysis (SA) :

Is the study of how the uncertainty in the output of a model (numerical or otherwise) can be apportioned to different sources of uncertainty in the model input. In more general terms uncertainty and sensitivity analysis investigate the robustness of a study when the study includes some form of statistical modelling. Sensitivity analysis can be useful to computer modelers for a range of purposes including:

Support decision making or the development of recommendations for decision makers (e.g. testing the robustness of a result); Enhancing communication from modellers to decision makers (e.g. by making recommendations more credible, understandable, compelling or persuasive); Increased understanding or quantification of the system (e.g. understanding relationships between input and output variables); and Model development (e.g. searching for errors in the model).

Sometimes a sensitivity analysis may reveal surprising insights about the subject of interest. For instance, the field of multi-criteria decision making (MCDM) studies (among other topics) the problem of how to select the best alternative among a number of competing alternatives. This is an important task in decision making. In such a setting each alternative is described in terms of a set of evaluative criteria. These criteria are associated with weights of importance. Intuitively, one may think that the larger the weight for a criterion is, the more critical that criterion should be.

Applications

To simplify models To investigate the robustness of the model predictions To play what-if analysis exploring the impact of varying input assumptions and scenarios As an element of quality assurance (unexpected factors sensitivities may be associated to coding errors or misspecifics).

EXPECTED VALUE OF PERFECT INFORMATION: EXPECTED VALUE OF PERFECT INFORMATION (EVPI) is the difference between the

expected value with (additional) perfect information and the expected value with

current information. The expected value of perfect information is the maximum amount a decision maker should pay for additional information that gives a perfect signal as to the state of nature. In decision theory, the expected value of perfect information (EVPI) is the price that one would be willing to pay in order to gain access to perfect information.[1] The problem is modeled with a payoff matrix Rij in which the row index i describes a choice that must be made by the payer, while the column index j describes a random variable that the payer does not yet have knowledge of, that has probability pj of being in state j. If the payer is to choose i without knowing the value of j, the best choice is the one that maximizes the expected monetary value:

where

is the expected payoff for action i i.e. the expectation value, and

is choosing the maximum of these expectations for all available actions. On the other hand, with perfect knowledge of j, the player may choose a value of i that optimizes the expectation for that specific j. Therefore, the expected value given perfect information is

where is the probability that the system is in state

j, and is the pay-off if one

follows action i while the system is in state j. Here indicates the best choice of action i for each state j. The expected value of perfect information is the difference between these two quantities,

This difference describes, in expectation, how much larger a value the player can hope to obtain by knowing j and picking the best i for that j, as compared to picking a value of i before j is known. Note: EV|PI is necessarily greater than or equal to EMV. That is, EVPI is always non-negative. EVPI provides a criterion by which to judge ordinary mortal forecasters. EVPI can be used to reject costly proposals: if one is offered knowledge for a price larger than EVPI, it would be better to refuse the offer. However, it is less helpful when deciding whether to accept a forecasting offer, because one needs to know the quality of the information one is acquiring

Feasible Region :
The feasible region determined by a collection of linear inequalities is the collection of points that satisfy all of the inequalities.

To sketch the feasible region determined by a collection of linear inequalities in two variables: Sketch the regions represented by each inequality on the same graph, remembering to shade the parts of the plane that you do not want. What is unshaded when you are done is the feasible region. The feasible region for the following collection of inequalities is the unshaded region shown below (including its boundary). 3x - 4y 12, x + 2y 4 x1 y 0.

VAM- Vogels approximation method:

Step-I: Against each row and column of the matrix, denote the difference between the two least cost in that particular row and column. Step-II: Select the maximum value noted as per step-I, in this row or column select the cell which has the least cost. Step-III: Allocate the maximum possible quantity. Step-IV: After fulfilling the requirements of that particular row or column, Ignore that particular row or column and recalculate the difference by the two lowest cost for each of the remaining rows or columns, Again select the maximum of these differences and allocate the maximum possible quantity in the cell with the lowest cost in that particular corresponding row or column. Step-V: Repeat the procedure till the initial allocation is completed