Monte Carlo Simulation

• When systems contain elements that exhibit chance in their behavior, the
Monte Carlo method of simulation can be applied
• Some examples are:
1. Inventory demand
2. Lead time for inventory
3. Times between machine breakdowns
4. Times between arrivals
5. Service times
6. Times to complete project activities
7. Number of employees absent
 Monte Carlo Simulation
• The basis of the Monte Carlo simulation is experimentation on the
probabilistic elements through random sampling
• It is based on the following five steps:
1. Setting up a probability distribution for important variables
2. Building a cumulative probability distribution for each variable
3. Establishing an interval of random numbers for each variable
4. Generating random numbers
5. Actually simulating a series of trials
 Harry’s Auto Tire Example
• A popular radial tire accounts for a large portion of the sales at
Harry’s Auto Tire
• Harry wishes to determine a policy for managing this inventory
• He wants to simulate the daily demand for a number of days
Step 1: Establishing probability distributions
• Historical daily demand DEMAND FOR TIRES FREQUENCY (DAYS)
for radial tires
0 10
1 20
2 40
3 60
4 40
5 30
200
Table 15.1
 Step 2: Building a cumulative probability distribution for each variable
DEMAND VARIABLE PROBABILITY OF OCCURRENCE
• Probability of 0 10/200 = 0.05
demand for 1 20/200 = 0.10
radial tires
2 40/200 = 0.20
3 60/200 = 0.30
4 40/200 = 0.20
5 30/200 = 0.15
Table 15.2 200/200 = 1.00

DAILY DEMAND PROBABILITY CUMULATIVE PROBABILITY

0 0.05 0.05
• Cumulative
probability for 1 0.10 0.15
radial tires 2 0.20 0.35
3 0.30 0.65
4 0.20 0.85
5 0.15 1.00
Step 3: Setting random number intervals
• Graphical representation of
the cumulative probability
distribution
for radial 1.00
tires 1.00 – – 00
0.85
– 86
0.80 – 85
Represents 4 Tires
Demanded
0.65

Cumulative Probability
– 66
0.60 – 65

Numbers
Random
0.40 – 0.35
– 36
35

0.20 – 0.15
– 16
15 Represents 1 Tire
0.05 Demanded
–– 06
Figure 15.2 0.00 – – 05
01
0 1 2 3 4 5
Daily Demand for Radials
 • Assignment of random number intervals for Harry’s Auto Tire
DAILY DEMAND PROBABILITY CUMULATIVE INTERVAL OF
PROBABILITY RANDOM NUMBERS
0 0.05 0.05 01 to 05
1 0.10 0.15 06 to 15
2 0.20 0.35 16 to 35
3 0.30 0.65 36 to 65
4 0.20 0.85 66 to 85
Table 15.4 5 0.15 1.00 86 to 00
 Step 4: Generating random numbers
• Table of random numbers (partial)
52 06 50 88 53 30 10 47 99 37
37 63 28 02 74 35 24 03 29 60
82 57 68 28 05 94 03 11 27 79
69 02 36 49 71 99 32 10 75 21
98 94 90 36 06 78 23 67 89 85
96 52 62 87 49 56 59 23 78 71
33 69 27 21 11 60 95 89 68 48
50 33 50 95 13 44 34 62 64 39
88 32 18 50 62 57 34 56 62 31
Table 15.5 90 30 36 24 69 82 51 74 30 35
 Step 5: Simulating the experiment
• Ten-day simulation of demand for radial tires
DAY RANDOM NUMBER SIMULATED DAILY DEMAND
1 52 3
2 37 3
3 82 4
4 69 4
5 98 5
6 96 5
7 33 2
8 50 3
9 88 5
10 90 5
39 = total 10-day demand
Table 15.6 3.9 = average daily demand for tires
Expected daily 5
demand
  Probability of i tiresDemand of i tires
i 0

 (0.05)(0) + (0.10)(1) + (0.20)(2) + (0.30)(3)

+ (0.20)(4) + (0.15)(5)
 2.95 tires
 Using QM for Windows for Simulation
• Monte Carlo simulation of Harry’s Auto Tire using QM for
Windows

Program 15.1
 Simulation with Excel Spreadsheets
• Using Excel to simulate tire demand for Harry’s Auto Tire
Shop

Program 15.2A
 Simulation with Excel Spreadsheets
• Excel simulation results for Harry’s Auto Tire Shop
showing a simulated average demand of 2.8 tires per day

Program 15.2B