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Simulation
Dr. Muhammad Mahbubur Rahman
Professor, DBA, IIUC

4.1. Introduction
Simulation is a widely used quantitative technique to solve complex managerial decision-
making problems under conditions of uncertainty. In situations where the mathematical
formulation of the problems is not possible, simulation technique is used by representing
reality through a model that will respond in same manner as in a real life situation. It is
developed for studying alternative courses of action by constructing a model of that
system and then conducting a series of repeated trial and error experiments to predict the
behaviour of the system over a period of time. Simulation determines the effect of a
number of alternative policies without disturbing the real system. It helps in selecting the
best policy with the prior assurances that its implementation will be benefited.
The simulation technique was developed and applied by two mathematicians, Prof. John
Von Neumann and Prof. Stanislaw Ulam, during World War II, for studying the tedious
behavior of neutrons in a nuclear shielding problem, which was too complex for
mathematical analysis or too expensive to real experimentation. With the remarkable
success of the technique on neutron problem, it became popular and found many
applications in business and industry. The rapid progress of simulation technique was
made after development of digital computer in early 1950s.
Simulation can be defined as – A representation of reality through the use of a model or
other device which will react in the same manner as reality under a given set of
conditions.” According to Donald G. Malcolm, simulation may be defined as – One
which depicts the working of a large scale system of men, machine, materials and
information operating over a period of time in a simulated environment of the actual real
world conditions. The precise definition of simulation given by Shannon is – Simulation
is the process of designing a model of a real system and conducting experiments with this
model for the purpose of understanding the behavior (within the limits imposed by a
criterion or a set of criteria) for the operation of the system.
However, after the above discussion it can be concluded that when the characteristics
such as uncertainty, complexity, dynamic interaction between the decision and
subsequent event, and the need to develop detailed procedures and finely divided time
intervals, combine together in one situation, it becomes too complex to be solved by any
of the techniques of mathematical programming and probabilistic models. It must be
analyzed by some other kind of quantitative techniques which may give quite accurate
and reliable results. Many new techniques are coming up, but, so far, the best available is
simulation.
4.2. Phases of Simulation Process
The process of simulating a system consists of following steps:
Step 1: Define the problem
Step 2: Identify the decision variables
Step 3: Construct a numerical model
Step 4: Validate the model
Step 5: Design the experiments
Step 6: Conduct / run the simulation technique
Step 7: Examine the results in terms of problem solution
Step 8: Select the best course of action
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Figure: Schematic Presentation of a Simulation Process.

Real World Problem

Problem Definition

Identifying the decision variables,

performance criterion & decision rules

Construction of the simulation model

Testing and Validating the model

Designing the Experiments Modify the model by

(Specifying the values of decision changing the input data i.e.
variables to be tested) values of decision variables

Conducting the Experiments

No
Is Simulation process completed?
Yes
Evaluating the results

Selecting the best course of action

4.3. Practical Applications of Simulation Technique

Some of the applications in real world are given below:
1. Assembly scheduling
2. Banks ATM scheduling
3. Brand selection
4. Advertising allocation
5. Locating warehouses
6. Testing inventory order policies
7. Manpower hiring decisions
8. Maintenance scheduling
9. Aircraft, Bus and Job shop scheduling
10. Telephone traffic routine
11. Library operations design
12. Parking facility design
13. Water resource development
14. Design of distribution systems
15. Design of parking lots, harbors and communication system etc.
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4.4. Advantages of Simulation

The simulation technique, when compared with the mathematical programming and
standard probability analysis, offers a number of advantages over these techniques. The
mentionable important advantages can be summarized as follows:
1. Simulation technique is comparatively flexible and straightforward which can
be modified to accommodate the changing environments of the real situation.
2. Simulation technique is easier to use than pure analytical methods as it is
relatively free from mathematics and thus can be easily understood by the
operating personnel and non technical managers.
3. This approach is suitable to analyze large and complex real life problems, which
cannot be solved by usual quantitative methods.
4. Simulation allows the decision maker to study the interactive effect of
individual variables in order to determine the desired one.
5. Simulation technique allows to include additional information during analysis
period that most quantitative approaches do not permit.
6. Through simulation, management can foresee the unknown bottlenecks in
problems where it is difficult to predict by other techniques.
7. It is a valuable method of breaking down a complicated system into a sub-
system and then study each of these sub-systems individually or jointly with
others.
8. Simulation may be the only method available when it is difficult to observe the
actual reality.
9. For further analysis, data can be generated usually from a simulation model.
10. Simulation can be used as a pre-service test to try out new policies and decision
rules for operating a system before running the risk of experimentation in the
real system.

4.5. Disadvantages of Simulation

In spite of all advantages claimed by the simulation technique, in very large and complex
problems simulation may suffer from the same deficiencies as other mathematical
models. The significant limitations of simulation technique are as follows:
1. Simulation does not generate optimum solution to problems as do other
quantitative techniques. When the model deals with uncertainties, the results of
simulation are only reliable approximations subject to statistical error.
2. Quantification of the variables is another difficulty. In a number of situations it
is not possible to quantify all the variables that affect the behavior of the system.
3. In very large and complex problems, a significant number of variables and the
inter-relationships between them make the problems very unwieldy and hard to
program.
4. It is often a long and complicated process to develop a model. In some
situations, simulation is comparatively time consuming and expensive process
because a number of simulation runs are required to solve a problem.
5. Each simulation model is unique and its solutions and inferences are not usually
transferable to other problems.
6. The simulation model does not produce answers by itself. The user has to
provide all the constraints for the solutions, which he wants to examine.
7. Each application of simulation is ad-hoc to a great extent.
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4.6. Methods of Simulation

There are two methods of simulation as follows:
(i) Monte Carlo simulation method
(ii) System simulation method
4.6.1. Monte-Carlo Method
The Monte Carlo technique is the most popular method of simulation which involves
random sampling from the probability distributions that represent the real-life process.
This method of simulation owes its development to the two mathematicians, John Von
Neumann and Stanislaw Ulam, who suggested solution technique for puzzling problem of
behavior of neutrons during World War II. The technique provided an approximate but
quite workable solution to the problem. The mathematical technique they applied had
been known for many years, but it was at this stage that it has been given the name
Monte Carlo (named after the famous gambling kingdom). With the remarkable success
of the technique on neutron problem, it soon became popular and found many
applications in business and industry.
Monte Carlo technique has been used to tackle a variety of problems involving stochastic
situations and mathematical problems, which cannot be solved with mathematical
techniques and where physical approximation with the actual system is impracticable.
This method of simulation is a substitute for the mathematical evaluation of a model. It
uses experimentation with the help of the probability theory. The experimentation is
performed on a simulated model of the real system. It is a sort of sampling technique in
which, instead of drawing samples from a real population, the samples are drawn from a
theoretical equivalent of the real population. Random numbers constitute the basic tool of
Monte Carlo method.
Steps of Monte Carlo Simulation Method:
(i) Setting up a probability distribution for important variables.
(ii) Constructing a cumulative probability distribution for each variable in step-1.
(iii) Establishing an interval of random numbers for each variable.
(iv) Generating random numbers.
(v) Projecting a corresponding random observation of the variable.
(vi) Stabilization of the simulation process

4.6.2. System Simulation Method

System simulation is developed to solve complex and intricate problems of managerial
decision-making when actual experimentation with the system may be complicated and
may be uneconomical. System simulation method is one wherein there is reproduction of
the operating environment and the system allows for analyzing the response from the
environment to alternative management actions. In this simulation system, a complex
problem is formulated into a mathematical model for which a computer program is
developed and the problem is solved by using high speed electronic computer, and hence
it is named as computer simulation or system simulation.
It is a procedure that attempts to recreate a problem situation under study by developing a
computer model of the process. Typically it is used to model random processes that are
too complex to be solved by analytical techniques. The advantage of using computer
simulation is that many different policies and scenarios can be compared in a relatively
short amount of time. Additionally, computer simulation is relatively easy to explain and
is understandable to management. It is flexible enough to be applicable to a wide variety
of situations including waiting line systems, production and inventory systems and
financial systems.
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4.7. Some Real Life Problems

Problem 1: Bright Bakery keeps stock of a popular brand of cake. Previous experience
indicates the daily demand pattern for the item with associated probabilities as given
below:
Daily demand (units) 0 10 20 30 40 50
Probability 0.01 0.20 0.15 0.50 0.12 0.02
Consider the following sequence of random numbers for next 10 days:
25, 39, 65, 76, 12, 05, 73, 89, 19, 49.
Requirements:
(i) Using the sequence simulate the demand for the next 10 days and find out the
stock situation if the owner of the Bakery decides to make 40 cakes every day.
(ii) Also estimate the daily average demand for the cakes on the basis of simulated
data.
Problem 2: An automobile company manufactures around 200 motorized bicycles.
Depending upon the availability of raw materials and other conditions, the weekly
production varies from 196 to 204 bicycles, whose probability distributions are given as
below:
Production (per week) 196 197 198 199 200 201 202 203 204
Probabilities 0.05 0.09 0.12 0.14 0.20 0.15 0.11 0.08 0.06
The finished bicycles are transported in a specially designed three storied lorry that can
accommodate only 200 bicycles. Use the following 15 random numbers:
82, 89, 78, 24, 53, 61, 18, 45, 04, 23, 50, 77, 27, 54, 10.
Simulate the process and find out:
(i) The average number of bicycles waiting in the factory.
(ii) The average number of empty spaces on the lorry.
Problem 3: A company manufactures 30 perishable items per day. The sale of these
items depends upon demand which has the following distribution:
Sales (units) : 27 28 29 30 31 32
Frequency : 5 8 10 17 7 3
The production cost and sales price of each unit are Tk.40 and Tk.50 respectively. Any
unsold product is to be disposed at Tk.25 per unit. There is a penalty of Tk.5 per unit if
the demand is not fulfilled.
Considering the following random numbers for the next 10 days:
10, 99, 65, 99, 95, 01, 79, 11, 16, 20.
Simulate the data and find
(i) The total profit / loss of the company for the next 10 days.
(ii) The advantage or disadvantage of the company if the company decides to produce
31 items per day.
Problem 4: The management of ABC Company is considering the question of marketing
a new product. The fixed cost required in the project is Tk.4,000. Tree factors are
uncertain, which are the selling price, variable cost and the annual sales volume. The
product has a life cycle of one year. The management has the data on these three factors
as under:
Factor 1 Factor 2 Factor 3
Selling price Variable cost Sales volume
Probability Probability Probability
(in Tk.) (in Tk.) (in unit)
3 0.2 1 0.3 2,000 0.3
4 0.5 2 0.6 3,000 0.3
5 0.3 3 0.1 5,000 0.4
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Considering the following sequence of 30 random numbers:

81, 32, 60, 04, 46, 31, 67, 25, 24, 10, 40, 02, 39, 68, 08, 59, 66, 90, 12, 64, 79,
31, 46, 68, 82, 89, 25, 11, 98, 16.
Using the sequence (first 3 random numbers for the first trial, etc.), simulate the average
profit for the above project on the basis of 10 trials.

Problem 5: The investment corporation of Bangladesh wants to study the investment

project based on three factors: market demand in units, profit per unit and the investment
required. These factors are felt to be independent of each other. In analyzing a new
consumer product, the corporation estimates the following probability distribution:
Annual demand Profit per unit Investment required
Units Probability Tk. Probability Tk. Probability
20,000 0.05 3.00 0.10 17,50,000 0.25
25,000 0.10 5.00 0.20 20,00,000 0.50
30,000 0.20 7.00 0.40 25,00,000 0.25
35,000 0.30 9.00 0.20
40,000 0.20 10.00 0.10
45,000 0.10
50,000 0.05
Considering the following random number:
For demand : 28 57 60 17 64 20 27 58 61 30
For profit / unit: 19 07 90 02 57 28 29 83 58 41
For investment : 17 67 16 71 43 68 47 24 19 97
Using simulation process, repeat the trial 10 times, compute the return on investment for
each trial taking these three factors into account approximately, select the most likely
return.

Problem 6: Dr. AR Khan is a dentist who schedules all his patients for 30 minutes
appointments. Some of the patients have taken more than 30 minutes depending on the
type of dental work to be done. The following summary shows the various categories,
their probabilities and the time actually needed to complete the work
Category Time required (minutes) Probability
Filling 45 0.36
Crown 60 0.15
Cleaning 15 0.19
Extraction 45 0.10
Checkup 15 0.20
Stimulate the dentist’s clinic for five hours and determine the average waiting time for
the patients. Assume that all the patients reach at the clinic at their exact scheduled
arrival time starting at 4:00 PM. Use the following random numbers for handling the
above problem: 40 82 11 34 25 66 17 79 46 59.
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Problem 7: The price change of shares of ABC Company has been observed over the
past 50 trades. The frequency distribution is as follows:

Price Change Frequency (No of Trades)

-3/8 4
-1/4 2
-1/8 8
0 20
1/8 10
1/4 3
3/8 2
1/2 1
Requirements:
(i) Develop a relatively frequency distribution for this data.
(ii) If the current price per share of ABC Company is 23, use random numbers to
simulate the price per share over the next 20 trades.
(iii) Compare this price with the expected price one would obtain based on the
probability distribution.

…..The End…..