Chapter 10

Business Analytics with

Simulation

Business
Business Analytics
Analytics with
with Management
Management Science
Science
Models
Models and
and Methods
Methods

Arben Asllani
University of Tennessee at Chattanooga
 Chapter Objectives
 Discuss the potential use of computer simulation to improve organizational
performance
 Explore the role of simulation as a management science tool for
optimization and decision making
 Discuss advantages and disadvantages of using simulation as a decision
making tool
 Provide examples of systems from real world business situations and
explain how simulation can be used to improve such systems
 Distinguish between discrete and continuous simulation models and their
ability to replicate business settings
 Distinguish between static and a dynamic simulation models and their ability
to replicate business settings
 Chapter Objectives
 Distinguish between deterministic and stochastic simulation models
and explore business situations where these models can be used
 Discuss the four basic elements a computer simulation model:
entities, locations, processes, and resources
 Suggest a simulation methodology which can be used to model
business situations in the era of big data and underscore the
importance of following each step in the methodology
 Discuss potential sources of data inputs for simulation models and
how big data have changed the process of data collection
 Understand the concept of validation and verification as an
important step in the simulation process
 Chapter Outline

 Chapter Objectives
 Simulation in Action
 Introduction
 Basic Simulation Terminology
 Simulation Methodology
 Simulation Methodology in Action
 Exploring Bid Data with Simulation
 Wrap up
 Simulation in Action
 Blood Assurance is a full-service regional blood center serving
more than 70 health care facilities
 Primary goal: to meet the demand for platelets and minimize waste
 A simulation based decision support system to investigate,
design, and test alternative strategies for platelet collection
 Objective: to develop a platelet collection strategy that would reduce
waste and meet demand for type specific platelets
 Allows modeling of complex and stochastic problems.
 Mimic the complexity of the blood inventory management system.
 Suggest appropriate collection strategies to reduce platelet waste by
50% and decrease unmet demand for type specific platelets by 16%.
 Introduction
 What is Simulation?
 One of the most preferred techniques when investigating the behavior of
complex business models.
 An effective method to assist management in evaluating different
operational alternatives.
 In a case-by-case basis, the simulation methodology can generate
acceptable policies that are nearly optimal
 Advantages of Simulation
 To investigate a wide variety of “what if” questions about real-world
systems before implementing potential costly changes
 can test new facility locations, product designs, or new scheduling
policies without any cost disruptions
 Basic Simulation Terminology

 System
 A collection of entities and sub-entities that interact
with each other as they process input into output
 A simulation model is also a system because it is
used to represent a real life system
 State of a system
 the set of variables necessary to describe the
system and their values at a given point
 Basic Simulation Terminology

 Discrete versus continuous models

 A simulation model is discrete when the state of
the variables changes at discrete points in time
 A continuous simulation model, on the other
hand, has variables whose state changes
continuously.
 Changes in the continuous models are tracked
over time according to a set of equations,
typically involving differential equations
 Basic Simulation Terminology
 Static versus dynamic simulation models
 A static simulation model represents the system at a given
point in time
 Static simulation models are sometimes referred as Monte
Carlo simulation models
 A dynamic model, however, represents the system over a
period of time
 Deterministic versus stochastic simulation model
 A deterministic simulation model contains no random variables
 Stochastic simulation models have at least one random input
variable, and thus random output of stochastic models
Simulation Methodology
 Problem Description
 The basis of the simulation model
 Sources:
 Requests for proposal documents
 Business reports
 Interviews with the management team
 Other sources

 Purpose of the study can help establish the objective function or

dependent variables
 The scope of the study is defined by
w Time required to complete the simulation study
w The organizational unit which is included in the study
 Conceptual Model
1. Starts with identifying the goals of the model
2. The modeler identifies the set of input variables for the model
 Stochastic or Deterministic
3. Relationships between variables are explored.
1. Intermediate variables are calculated; later lead to output variables
4. A high level flow diagram or a pseudo code
5. The final goal of the conceptual model: to produce a list of information
requirements.
6. The modeler needs to answer the following questions:
1. What information is needed to build the simulation model?
2. What information is already available?
3. What information needs to be collected?
 Data Collection

 Data is collected through historical records, system

documentations, personal observations, and
interviews
 Before being used in the model, data should be
tested:
 Must ensure that input variables are independent
 Must also ensure that input variables are
homogenized
 Must represent the input variables as to their
deterministic or stochastic values
 Computer Simulation Model
 A logical model of the process must be developed based on:
 The data collected
 The modeling constructs of the simulation software
 Four basic elements
 Entities, Locations, Process flow for entities and Resources.
 Several software packages provide the ability to generate random values
 A pilot run with a limited number of replications
 The validation process ensures that the simulation model represents the
correct real life system
 The verification process ensures that the simulation model represents the
real life system correctly
 Design Experiments
and Simulation Run
 Design Experiments
 One of the main advantages of simulation is the ability of the
decision maker to conduct If-Then scenarios without actually
making physical changes to the existing system
 With a validated model a variety of alternatives may be tested
and optimized: to identify the best scenarios and the minimum
number of replications
 Simulation Runs
 Many simulation software programs allow for a visual
observation, and the decision maker can gain important insight
by studying the changes of the state of the system overtime
 Analyze Output
Results and Recommendations
 Analyze Output
 The statistical analysis of the output variables is conducted
 Points and intervals are estimated to measure the performance of the
system, and hypothesis testing and risk analysis are performed and output
reports are prepared
 Results and Recommendations
 The simulation methodology concludes with a summary of the results, main
findings and conclusions, and most importantly practical recommendations
 The best scenario is identified and the best combination of decision
variables is recommended
 Far reaching decisions should not be based solely on the outcomes of
simulations
 Simulation Methodology
in Action
1. Problem Description
 A fictional Blood Bank Agency (BBA) wants to determine the optimal level of
collection is in order to maximize the agency’s revenue and meet the weekly
demand for blood platelets
 Assume that the agency spends about $150 to process collected blood units into
one unit of blood platelets
 The agency charges receiving hospitals about $400 per platelet
 There is also a $20 disposal cost for each unit of unused platelets
2. Conceptual Model
 Ideally the agency should collect enough platelets to meet the demand but not
exceed it.
 The platelet inventory management is complicated by unpredictable demand for a
product with a shelf life of only a few days.
 Simulation Methodology
in Action
 Data Collection
 The simulation model implements a stochastic pull system
 Data used in the model can be retrieved from the operational
activity of the blood center during one full year
 The weekly demand for platelets is an uncontrolled variable

Weekly Demand for Platelets Probability

300 .10

500 .25

800 .35
 Simulation Methodology
in Action
 Computer Simulation Model
 Simulation Methodology
in Action
 Analyze Output, Results, and Recommendations

 As a result, the recommendation is that the blood bank

agency must establish a collection level goal between
800 to 1000 unit platelets per week
 Exploring Big Data with
Simulation

 Simulation models can use big data to provide

more in-depth analysis and processing in advance
 Volume: allows the simulation modeler to use larger data
sets to better define statistical distributions which then
generate more reliable inputs for the simulation model.
 Simulation modeling focuses more on relationships and
less on causality, as such it can be an appropriate tool to
deal with the high complexity and with large amount of
computations presented by big data.
 Wrap up

 The importance of simulation has increased significantly.

 As velocity and variety of data increase, the decision makers turn
to simulation as an appropriate tool for complex systems and
uncertain data.
 As volume increases, decision makers can take advantage of
statistical fitting software to better estimate statistical distributions
of input variables.
 Simulation models allow the decision makers to compare
alternative scenarios and control variables in ideal
experimental conditions without altering the physical reality
and, in so doing, save costs.
 Wrap up
 The use of Microsoft Excel is suggested for relatively
simple models.
 The proposed methodology can also be used when
specialized simulation software is utilized to model more
advanced and complex business systems.
 The model validation and verification processes are very
important for the reliability of the simulation results
 Simulations should always be accompanied by appropriate
statistical analysis for both summary and analysis of large
volumes of output generated by such models.