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Simulation

Chapter 14
14-2
The Monte Carlo Process
Computer Simulation with Excel Spreadsheets
Simulation of a Queuing System
Continuous Probability Distributions
Statistical Analysis of Simulation Results
Crystal Ball
Verification of the Simulation Model
Areas of Simulation Application

Chapter Topics
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Analogue simulation replaces a physical system with an analogous
physical system that is easier to manipulate.

In computer mathematical simulation a system is replaced with a
mathematical model that is analyzed with the computer.

Simulation offers a means of analyzing very complex systems
that cannot be analyzed using the other management science
techniques in the text.
Overview
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A large proportion of the applications of simulations are for
probabilistic models.

The Monte Carlo technique is defined as a technique for selecting
numbers randomly from a probability distribution for use in a trial
(computer run) of a simulation model.

The basic principle behind the process is the same as in the
operation of gambling devices in casinos (such as those in Monte
Carlo, Monaco).
Monte Carlo Process
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Table 14.1 Probability Distribution of Demand for Laptop PCs
In the Monte Carlo process, values for a random variable are
generated by sampling from a probability distribution.
Example: ComputerWorld demand data for laptops selling for
$4,300 over a period of 100 weeks.
Monte Carlo Process
Use of Random Numbers (1 of 10)
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The purpose of the Monte Carlo process is to generate
the random variable, demand, by sampling from the
probability distribution P(x).

The partitioned roulette wheel replicates the probability
distribution for demand if the values of demand occur in
a random manner.

The segment at which the wheel stops indicates demand
for one week.
Monte Carlo Process
Use of Random Numbers (2 of 10)
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Figure 14.1 A Roulette Wheel for Demand
Monte Carlo Process
Use of Random Numbers (3 of 10)
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Figure 14.2
Numbered Roulette Wheel
Monte Carlo Process
Use of Random Numbers (4 of 10)
When the wheel is spun, the actual demand for PCs is determined by a
number at rim of the wheel.
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Table 14.2 Generating Demand from Random Numbers
Monte Carlo Process
Use of Random Numbers (5 of 10)
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Select number from a random number table:
Table 14.3 Delightfully Random Numbers
Monte Carlo Process
Use of Random Numbers (6 of 10)
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Repeating selection of random numbers simulates
demand for a period of time.

Estimated average demand = 31/15 = 2.07 laptop PCs
per week.

Estimated average revenue = $133,300/15 = $8,886.67.


Monte Carlo Process
Use of Random Numbers (7 of 10)
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Monte Carlo Process
Use of Random Numbers (8 of 10)
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Table 14.4
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Average demand could have been calculated analytically:
per week s PC' 1.5
) 4 )( 10 (. ) 3 )( 10 (. ) 2 )( 20 (. ) 1 )( 40 (. ) 0 )( 20 (. ) (
: therefore
values demand different of number the
demand of y probabilit ) (
i value demand
: where
1
) ( ) (
=
+ + + + =
=
=
=

=
=
x E
n
x P
x
n
i
x x P x E
i
i
i i
Monte Carlo Process
Use of Random Numbers (9 of 10)
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The more periods simulated, the more accurate the results.

Simulation results will not equal analytical results unless enough
trials have been conducted to reach steady state.

Often difficult to validate results of simulation - that true steady
state has been reached and that simulation model truly replicates
reality.

When analytical analysis is not possible, there is no analytical
standard of comparison thus making validation even more difficult.
Monte Carlo Process
Use of Random Numbers (10 of 10)
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As simulation models get more complex they become impossible
to perform manually.

In simulation modeling, random numbers are generated by a
mathematical process instead of a physical process (such as wheel
spinning).

Random numbers are typically generated on the computer using a
numerical technique and thus are not true random numbers but
pseudorandom numbers.

Computer Simulation with Excel Spreadsheets
Generating Random Numbers (1 of 2)
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Artificially created random numbers must have the following
characteristics:
1. The random numbers must be uniformly
distributed.
2. The numerical technique for generating the numbers
must be efficient.
3. The sequence of random numbers should reflect no
pattern.
Computer Simulation with Excel Spreadsheets
Generating Random Numbers (2 of 2)
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Exhibit 14.1
Simulation with Excel Spreadsheets (1 of 3)
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Exhibit 14.2
Simulation with Excel Spreadsheets (2 of 3)
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Exhibit 14.3
Simulation with Excel Spreadsheets (3 of 3)
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Revised ComputerWorld example; order size of one laptop each week.
Computer Simulation with Excel Spreadsheets
Decision Making with Simulation (1 of 2)
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Exhibit 14.4
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Order size of two laptops each week.
Computer Simulation with Excel Spreadsheets
Decision Making with Simulation (2 of 2)
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Exhibit 14.5
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Table 14.5 Distribution of Arrival Intervals
Table 14.6 Distribution of Service Times
Simulation of a Queuing System
Burlingham Mills Example (1 of 3)
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Average waiting time = 12.5days/10 batches
= 1.25 days per batch
Average time in the system = 24.5 days/10 batches
= 2.45 days per batch
Simulation of a Queuing System
Burlingham Mills Example (2 of 3)
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Simulation of a Queuing System
Burlingham Mills Example (3 of 3)
Caveats:
Results may be viewed with skepticism.
Ten trials do not ensure steady-state results.
Starting conditions can affect simulation results.
If no batches are in the system at start, simulation
must run until it replicates normal operating system.
If system starts with items already in the system,
simulation must begin with items in the system.
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Exhibit 14.6
Computer Simulation with Excel
Burlingham Mills Example
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minutes 2 .25 4 x .25, r if : Example
. determined is time" " for x value a r, number, random a generating By
r 4 x
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0
8
1
dx x
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8
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F(x)
: x of y probabilit Cumulative
(minutes) time x where 4 x 0 ,
8
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: Example
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= = =
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Continuous Probability Distributions
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Machine Breakdown and Maintenance System
Simulation (1 of 6)
Bigelow Manufacturing Company must decide if it should
implement a machine maintenance program at a cost of $20,000 per
year that would reduce the frequency of breakdowns and thus time
for repair which is $2,000 per day in lost production.

A continuous probability distribution of the time between machine
breakdowns:
f(x) = x/8, 0 s x s 4 weeks, where x = weeks between
machine breakdowns
x = 4*sqrt(r
i
), value of x for a given value of r
i
.
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Table 14.8
Probability Distribution of Machine Repair Time
Machine Breakdown and Maintenance System
Simulation (2 of 6)
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Table 14.9
Machine Breakdown and Maintenance System
Simulation (3 of 6)
Revised probability of time between machine breakdowns:
f(x) = x/18, 0 s xs6 weeks where x = weeks between machine
breakdowns
x = 6*sqrt(r
i
)
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Table 14.10
Machine Breakdown and Maintenance System
Simulation (4 of 6)
Simulation of system without maintenance program
(total annual repair cost of $84,000):
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Table 14.11
Machine Breakdown and Maintenance System
Simulation (5 of 6)
Simulation of system with maintenance program (total annual
repair cost of $42,000):
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Machine Breakdown and Maintenance System
Simulation (6 of 6)
Results and caveats:
Implement maintenance program since cost savings appear to be
$42,000 per year and maintenance program will cost $20,000 per
year.
However, there are potential problems caused by simulating
both systems only once.
Simulation results could exhibit significant variation since time
between breakdowns and repair times are probabilistic.
To be sure of accuracy of results, simulations of each system
must be run many times and average results computed.
Efficient computer simulation required to do this.
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Exhibit 14.7
Machine Breakdown and Maintenance System
Simulation with Excel (1 of 2)
Original machine breakdown example:
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Exhibit 14.8
Machine Breakdown and Maintenance System
Simulation with Excel (2 of 2)
Simulation with maintenance program.
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Outcomes of simulation modeling are statistical
measures such as averages.

Statistical results are typically subjected to additional
statistical analysis to determine their degree of accuracy.

Confidence limits are developed for the analysis of the
statistical validity of simulation results.
Statistical Analysis of Simulation Results (1 of 2)
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Formulas for 95% confidence limits:
upper confidence limit
lower confidence limit
where is the mean and s the standard deviation from a
sample of size n from any population.

We can be 95% confident that the true population mean will be
between the upper confidence limit and lower confidence limit.
) / )( . ( n s x 96 1 + =
) / )( . ( n s x 96 1 =
x
Statistical Analysis of Simulation Results (2 of 2)
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Simulation Results
Statistical Analysis with Excel (1 of 3)
Simulation with maintenance program.
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Exhibit 14.9
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Simulation Results
Statistical Analysis with Excel (2 of 3)
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Exhibit 14.10
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Exhibit 14.11
Simulation Results
Statistical Analysis with Excel (3 of 3)
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Crystal Ball
Overview
Many realistic simulation problems contain more complex
probability distributions than those used in the examples.

However there are several simulation add-ins for Excel that
provide a capability to perform simulation analysis with a
variety of probability distributions in a spreadsheet format.

Crystal Ball, published by Decisioneering, is one of these.

Crystal Ball is a risk analysis and forecasting program that
uses Monte Carlo simulation to provide a statistical range of
results.

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Recap of Western Clothing Company break-even and profit
analysis:
Price (p) for jeans is $23
variable cost (c
v
) is $8
Fixed cost (c
f
) is $10,000

Profit Z = vp - c
f
v
c

break-even volume v = c
f
/(p - c
v
)
= 10,000/(23-8)
= 666.7 pairs.
Crystal Ball
Simulation of Profit Analysis Model (1 of 15)
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Modifications to demonstrate Crystal Ball
Assume volume is now volume demanded and is defined by a
normal probability distribution with mean of 1,050 and
standard deviation of 410 pairs of jeans.
Price is uncertain and defined by a uniform probability
distribution from $20 to $26.
Variable cost is not constant but defined by a triangular
probability distribution.
Will determine average profit and profitability with given
probabilistic variables.

Crystal Ball
Simulation of Profit Analysis Model (2 of 15)
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Crystal Ball
Simulation of Profit Analysis Model (3 of 15)
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Crystal Ball
Simulation of Profit Analysis Model (4 of 15)
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Exhibit 14.12
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Crystal Ball
Simulation of Profit Analysis Model (5 of 15)
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Exhibit 14.13
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Crystal Ball
Simulation of Profit Analysis Model (6 of 15)
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Exhibit 14.14
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Crystal Ball
Simulation of Profit Analysis Model (7 of 15)
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Exhibit 14.15
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Crystal Ball
Simulation of Profit Analysis Model (8 of 15)
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Exhibit 14.16
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Crystal Ball
Simulation of Profit Analysis Model (9 of 15)
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Exhibit 14.17
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Crystal Ball
Simulation of Profit Analysis Model (10 of 15)
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Exhibit 14.18
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Crystal Ball
Simulation of Profit Analysis Model (11 of 15)
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Exhibit 14.19
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Crystal Ball
Simulation of Profit Analysis Model (12 of 15)
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Exhibit 14.20
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Exhibit 14.21
Crystal Ball
Simulation of Profit Analysis Model (13 of 15)
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Crystal Ball
Simulation of Profit Analysis Model (14 of 15)
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Exhibit 14.22
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Crystal Ball
Simulation of Profit Analysis Model (15 of 15)
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Exhibit 14.23
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Analyst wants to be certain that model is internally correct and
that all operations are logical and mathematically correct.
Testing procedures for validity:
Run a small number of trials of the model and compare
with manually derived solutions.
Divide the model into parts and run parts separately to
reduce complexity of checking.
Simplify mathematical relationships (if possible) for
easier testing.
Compare results with actual real-world data.
Verification of the Simulation Model (1 of 2)
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Analyst must determine if model starting conditions are correct
(system empty, etc).

Must determine how long model should run to insure steady-state
conditions.

A standard, fool-proof procedure for validation is not available.

Validity of the model rests ultimately on the expertise and
experience of the model developer.


Verification of the Simulation Model (2 of 2)
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Queuing
Inventory Control
Production and Manufacturing
Finance
Marketing
Public Service Operations
Environmental and Resource Analysis

Some Areas of Simulation Application
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Willow Creek Emergency Rescue Squad

Minor emergency requires two-person crew
Regular emergency requires a three-person crew
Major emergency requires a five-person crew
Example Problem Solution (1 of 6)
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Distribution of number of calls per night and emergency type:










Calls Probability
0
1
2
3
4
5
6

.05
.12
.15
.25
.22
.15
.06
1.00

Emergency Type Probability
Minor
Regular
Major

.30
.56
.14
1.00

Example Problem Solution (2 of 6)
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1. Manually simulate 10 nights of calls
2. Determine average number of calls
each night
3. Determine maximum number of
crew members that might be needed
on any given night.

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Calls Probability
Cumulative
Probability
Random Number
Range, r
1

0
1
2
3
4
5
6

.05
.12
.15
.25
.22
.15
.06
1.00
.05
.17
.32
.57
.79
.94
1.00

1 5
6 17
18 32
33 57
58 79
80 94
95 99, 00


Emergency
Type
Probability
Cumulative
Probability
Random Number
Range, r
1

Minor
Regular
Major

.30
.56
.14
1.00
.30
.86
1.00

1 30
31 86
87 99, 00


Step 1: Develop random number ranges for the probability distributions.
Example Problem Solution (3 of 6)
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Step 2: Set Up a Tabular Simulation (use second column of random
numbers in Table 14.3).
Example Problem Solution (4 of 6)
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Step 2 continued:
Example Problem Solution (5 of 6)
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Step 3: Compute Results:

average number of minor emergency calls per night = 10/10 =1.0
average number of regular emergency calls per night =14/10 = 1.4
average number of major emergency calls per night = 3/10 = 0.30

If calls of all types occurred on same night, maximum number of
squad members required would be 14.
Example Problem Solution (6 of 6)
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