Simulation Project

Simulation:
The process of building a logical or mathematical model
of a system or a decision problem, and experimenting
with the model to obtain insight into the system’s
behavior or to assist in solving the decision problem.
 Simulation Models
Deterministic Model
All data are assumed to
be known with certainty
Monte Carlo Simulation
A sampling experiment whose purpose
is to estimate the distribution of an
outcome variable that depends on
several probabilistic input variables.
(profit projection, stock portfolio).
Probabilistic Model
Some data are described by
probability distribution.
System Simulation
An experiment used to describe
sequences of events that occur over
time. (inventory, queuing,
manufacturing process)
 Example of Monte Carlo Simulation
Dave’s Candies is a small family-owned business that offers
gourmet chocolates and ice cream fountain service. For
special occasions such as Valentine’s Day, the store must
place orders for special packaging several weeks in advance
from their supplier. One product, Valentine’s Day Chocolate
Massacre, is bought for $7.50 a box and sells for $12.00. Any
boxes that are not sold by February 14 discounted by 50%
and can always be sold easily. Historically, the store has sold
between 40 and 90 boxes each year with no apparent trend
(either increasing or decreasing). Dave’s dilemma is deciding
how many boxes to order for the Valentine’s Day customers.
If demand exceeds the purchase quantity, Dave loses profit
opportunity. On the other hand, if too many boxes are
purchased, he will lose money by discounting them below
cost.
Cost: $7.50
Sales Price: $12.00
Discount Price: $6.00
Profit Formula:
12D – 7.50Q + 6(Q-D) if D  Q
Profit =
12Q – 7.50Q if D > Q
Q – Order quantity
D - Demand

Historical Data:

40 boxes 90 boxes
 Problem Statement:
The input to a simulation model of this situation would be:
1. The order quantity Q (the decision variable)
2. The various revenue and cost (constants)
3. The demand D (uncontrollable and probabilistic)
The model output we seek is the net profit
Project demand: Profit Formula:

Demand Probability Roll of Die 12D – 7.50Q + 6(Q-D) if D  Q

40 1/6 1 Profit =
50 1/6 2 12D – 7.50Q if D > Q
60 1/6 3 Q – Order quantity
70 1/6 4 D - Demand
80 1/6 5
90 1/6 6
Simulation Procedure:
1.    Select the order quantity (for example, Q = 60)
2.    Roll a die
3.    Determine the demand D from the foregoing table
4.    Using Q = 60, compute the profit using the equation
5.    Record the profit
10 replications of simulation (using Q=60)
Replication Roll of Die Demand Profit Demand Frequency Frequency(%)
1 5 80 $270 40 1 10%
2 3 60 $270 50 2 20
3 2 50 $210 60 3 30

4 4 70 $270 70 1 10

5 1 40 $150 80 2 20
90 1 10
6 3 60 $270
7 5 80 $270
Profit Frequency
8 6 90 $270
$150 10%
9 2 50 $210
$210 20%
10 3 60 $270
$270 70%
Average $246
 1000 replications (using Q=60)

Demand Frequency Frequency (%)

40 162 16.2%
Profit Frequency (%)
50 165 16.5
60 168 16.8 $150 20%
70 167 16.7 $210 21%
80 169 16.9 $270 59%
90 169 16.9

Ave. $237.57
Max. $270
Min. $151.35
SD $48
Order Average Min Max Std. Dev.
Quantity Profit Profit Profit
40 175 175 175 0
50 203.75 161.25 221.25 23
60 237.57 151.35 270 48
70 256.73 133.75 313.75 79
80 273.46 120 360 95
90 250.16 106.25 406.25 100
Procedure for Monte Carlo Simulation on Spreadsheets:
1. Develop the spreadsheet model
2. Generate random outcomes for each probabilistic variable according to
its probability distribution and apply the outcomes to the appropriate
formulas
3. Repeat step 2 a sufficient number of times to create a distribution of
results.
4. Compute summary statistics and collect output data in a frequency
distribution or histogram for analysis.

Random Number Generation:

 Tools/Data Analysis/Random Number Generation

Histogram
 Tools/Data Analysis/Histogram
1. Create the simulation model
2. Generate random numbers

From the menu bar, select Tools/Data Analysis/Random Number Generation.

The random-number-generation dialogue box will appear as in the following
figure.
You are asked to specify some values such
as Number of Variables (columns of
values you want generated), Number of
Random Numbers (number of data points
you want generated for each variable), the
type of distribution (default distribution is
discrete), input range (a discrete
distribution must contain two columns: the
left column contains the outcomes, and the
right column contains the probabilities
associated with the outcomes), output
range (the upper-left cell reference of the
output table that will store the outcomes).
3. Perform analysis

• Statistics
• Charts