Simulation Modeling

(Source: Quantitative Analysis for Management: Render et al.)

 Learning Objectives

1. Tackle a wide variety of problems by

simulation.
2. Understand the seven steps of conducting a
simulation.
3. Explain the advantages and disadvantages of
simulation.
4. Develop random number intervals and use
them to generate outcomes.
 Introduction
 Simulation is one of the most widely used
quantitative analysis tools.
 To simulate is to try to duplicate the features,
appearance, and characteristics of a real system.
 We will build a mathematical model that comes as
close as possible to representing the reality of the
system.
 Physical models can also be built to test systems.
 Introduction
Using simulation, a manager should:
1. Define a problem.
2. Introduce the variables associated with the
problem.
3. Construct a simulation model.
4. Set up possible courses of action for testing.
5. Run the simulation experiment.
6. Consider the results.
7. Decide what courses of action to take.
 Process of Simulation
Define Problem

Introduce Important
Variables

Construct Simulation
Model

Specify Values of
Variables to Be Tested

Conduct the
Simulation

Examine the
Results

Select Best Course

of Action
 Advantages and Disadvantages
of Simulation
The main advantages of simulation are:
1. It is relatively straightforward and flexible.
2. Recent advances in computer software make
simulation models very easy to develop.
3. Can be used to analyze large and complex
real-world situations.
4. Allows “what-if?” type questions.
5. Does not interfere with the real-world system.
6. Enables study of interactions between
components.
7. Enables time compression.
8. Enables the inclusion of real-world
complications.
 Advantages and Disadvantages
of Simulation

The main disadvantages of simulation are:

1. It is often expensive as it may require a long,
complicated process to develop the model.
2. It does not generate optimal solutions; it is a
trial-and-error approach.
3. It requires managers to generate all conditions
and constraints of real-world problem.
4. Each model is unique and the solutions and
inferences are not usually transferable to other
problems.
 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.
 Generating Random Numbers

 RAND (), RANDBETWEEN() functions

 Continuous Uniform Distribution

f(x) = 1/ (d-c) where c < x < d

The formula: c + (d – c) * RAND() generates random

numbers between c and d.
 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. Establishing 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
 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

 One way to establish a probability distribution for a
given variable is to examine historical outcomes.
 Managerial estimates based on judgment and
experience can also be used.
 Harry’s Auto Tire
Table 1
Historical Daily Demand for Radial Tires at Harry’s
Auto Tire and Probability Distribution
FREQUENCY
DEMAND FOR TIRES PROBAILITY OF OCCURRENCE
(DAYS)
0 10 10/200 = 0.05
1 20 20/200 = 0.10
2 40 40/200 = 0.20
3 60 60/200 = 0.30
4 40 40/200 = 0.20
5 30 30/200 = 0.15
200 200/200 = 1.00
 Harry’s Auto Tire
Step 2: Building a cumulative probability distribution
for each variable
 Converting from a regular probability to a
cumulative distribution is an easy job.
 A cumulative probability is the probability that a
variable will be less than or equal to a particular
value.
 A cumulative distribution lists all of the possible
values and the probabilities, as shown in Table 2.
 Harry’s Auto Tire
Table 2
Cumulative Probabilities for Radial Tires

DAILY DEMAND PROBABILITY CUMULATIVE PROBABILITY

0 0.05 0.05
1 0.10 0.15
2 0.20 0.35
3 0.30 0.65
4 0.20 0.85
5 0.15 1.00
 Harry’s Auto Tire
Step 3: Setting random number intervals
 Assign a set of numbers to represent each
possible value or outcome.
These are random number intervals.

A random number is a series of digits that have

been selected by a totally random process.

The range of the random number intervals

corresponds exactly to the probability of the
outcomes as shown in Figure 2.
 Harry’s Auto Tire
Graphical Representation of the Cumulative
Probability Distribution for Radial Tires
1.00
1.00 – – 00
0.85
– 86
0.80 – 85
Represents 4
Cumulative Probability

Tires Demanded
0.65
– 66
0.60 – 65

Numbers
Random
0.40 – 0.35
– 36
35

0.20 – 0.15
– 16
15 Represents 1
0.05 06 Tire Demanded
–
– 05
Figure 2 0.00 – – 01
0 1 2 3 4 5
Daily Demand for Radials
 Harry’s Auto Tire
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
5 0.15 1.00 86 to 00

Table 3
 Harry’s Auto Tire
Step 4: Generating random numbers
 Random numbers can be generated in several
ways.
 Large problems will use computer program to
generate the needed random numbers.
 For small problems, random processes like
roulette wheels or pulling chips from a hat may
be used.
 The most common manual method is to use a
random number table.
 Because everything is random in a random
number table, we can select numbers from
anywhere in the table to use in the simulation.
 Harry’s Auto Tire
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
90 30 36 24 69 82 51 74 30 35
Table 4
 Harry’s Auto Tire
Step 5: Simulating the experiment
 We select random numbers from Table 4.
 The number we select will have a corresponding
range in Table 3.
 We use the daily demand that corresponds to the
probability range aligned with the random
number.
 Harry’s Auto Tire
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
3.9 = average daily demand for tires
Table 5
 Harry’s Auto Tire
Note that the average demand from this simulation
(3.9 tires) is different from the expected daily
demand.
Expected 5
daily   Probabilit y of i tires Demand of i tires 
demand i 0

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

+ (0.20)(4) + (0.15)(5)
 2.95 tires
If this simulation were repeated hundreds or
thousands of times it is much more likely the
average simulated demand would be nearly the
same as the expected demand.