Slides by

John
Loucks
St. Edward’s
University

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 Chapter 12: Simulation

 Simulation Modeling
 Random Variables and Pseudo-Random Numbers
 Time Increments
 Experimental Design
 Simulation Applications
 Computer Implementation
 Verification and Validation
 Advantages and Disadvantages of Using Simulation

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 Simulation Modeling

 Simulation is one of the most frequently employed

management science techniques.
 It is typically used to model random processes that
are too complex to be solved by analytical methods.
 One begins a simulation by developing a
mathematical statement of the problem.
 Some input values for a simulation model are
constants and are referred to as the parameters of
the model.
 Other inputs are not known with certainty and are
considered probabilistic inputs.

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 What-If Analysis

 Risk analysis is the process of predicting the outcome

of a decision in the face of uncertainty.
 One approach to risk analysis is called what-if
analysis.
 A what-if analysis involves generating values for the
probabilistic inputs and computing the resulting value
for the output.
 The worst-case scenario can be examined by using
the most pessimistic input values, and the best-case
scenario can be studied using the most optimistic
input values.

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 Random Variables

 Random variable values are utilized in the model

through a technique known as Monte Carlo
simulation.
 Each random variable is mapped to a set of numbers
so that each time one number in that set is
generated, the corresponding value of the random
variable is given as an input to the model.
 The mapping is done in such a way that the likelihood
that a particular number is chosen is the same as the
probability that the corresponding value of the
random variable occurs.

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 Pseudo-Random Numbers

 Because a computer program generates random

numbers for the mapping according to some formula,
the numbers are not truly generated in a random
fashion.
 However, using standard statistical tests, the
numbers can be shown to appear to be drawn from a
random process.
 These numbers are called pseudo-random numbers.
 In Excel, a value can be obtained for a probabilistic
input that is normally distributed using the formula:
=NORMINV(RAND(),Mean, Standard Deviation)

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 Time Increments

 In a fixed-time simulation model, time periods are

incremented by a fixed amount. For each time
period a different set of data from the input
sequence is used to calculate the effects on the
model.
 In a next-event simulation model, time periods are
not fixed but are determined by the data values
from the input sequence.

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 Experimental Design

 Experimental design is an important consideration in

the simulation process.
 Issues such as the length of time of the simulation
and the treatment of initial data outputs from the
model must be addressed prior to collecting and
analyzing output data.
 Normally one is interested in results for the steady
state (long run) operation of the system being
modeled.
 The initial data inputs to the simulation generally
represent a start-up period for the process and it may
be important that the data outputs for this start-up
period be neglected for predicting this long run
behavior.

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 Experimental Design

 For each policy under consideration by the decision

maker, the simulation is run by considering a long
sequence of input data values (given by a pseudo-
random number generator).
 Whenever possible, different policies should be
compared by using the same sequence of input data.

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 Simulation Applications

 New Product Development

 The objective of this simulation is to determine the
probability that a new product will be profitable.
 A model is developed relating profit (the output
measure) to various probabilistic inputs such as
demand, parts cost, and labor cost.
 The only controllable input is whether to introduce
the product.
 A variety of possible values will be generated for the
probabilistic inputs, and the resulting profit will be
computed.

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 Simulation Applications

 Airline Overbooking
 The objective of this simulation is to determine the
number of reservations an airline should accept for
a particular flight.
 A simulation model is developed relating profit for
the flight to a probabilistic input, the number of
passengers with a reservation who show up and
use their reservation, and a controllable input, the
number of reservations accepted for the flight.
 For each selected value for the controllable input, a
variety of possible values will be generated for the
number of passengers who show up, and the
resulting profit can be computed.

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 Simulation Applications

 Inventory Policy
 The objective of this simulation is to choose an
inventory policy that will provide good customer
service at a reasonable cost.
 A model is developed relating two output measures,
total inventory cost and the service level, to
probabilistic inputs, such as product demand and
delivery lead time from vendors, and controllable
inputs, such as the order quantity and the reorder
point.
 For each setting of the controllable inputs, a variety
of possible values would be generated for the
probabilistic inputs, and the resulting cost and
service levels would be computed.

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 Simulation Applications

 Traffic Flow
 The objective of this simulation is to determine the
effect of installing a left turn signal on the flow of
traffic through a busy intersection.
 A model is developed relating waiting time for
vehicles to get through the intersection to
probabilistic inputs such as the number of vehicle
arrivals and the fraction that want to make a left turn,
and controllable inputs such as the length of time the
left turn signal is on.
 For each setting of the controllable inputs, values
would be generated for the probabilistic inputs, and
the resulting vehicle waiting times would be
computed.

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 Simulation Applications

 Waiting Lines
 The objective of this simulation is to determine the
waiting times for customers at a bank’s automated
teller machine (ATM).
 A model is developed relating customer waiting times
to probabilistic inputs such as customer arrivals and
service times, and a controllable input, the number of
ATM machines installed.
 For each value of the controllable input (the number
of ATM machines), a variety of values would be
generated for the probabilistic inputs and the
customer waiting times would be computed.

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 Example: Dynogen, Inc.

The price change of shares of Dynogen, Inc.

has been observed over the past 50 trades. The
frequency distribution is as follows:
Price Change Number 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
Total = 50

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 Example: Dynogen, Inc.

 Relative Frequency Distribution and

Random Number Mapping
Price Change Relative Freq. Random Numbers
-3/8 .08 0.00 but less than 0.08
-1/4 .04 0.08 but less than
0.12
-1/8 .16 0.12 but less than
0.28
0 .40 0.28 but less than
0.68
+1/8 .20 0.68 but less than
0.88
+1/4 .06 0.88 but less than 0.94

+3/8 .04 0.94 but less than

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 Example: Dynogen, Inc.

If the current price per share of Dynogen is 23, use

random numbers to simulate the price per share
over the next 10 trades.
Use the following stream of random numbers:
.21, .84, .07, .30, .94, .57, .57, .19, .84, .84

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 Example: Dynogen, Inc.

 Simulation Worksheet
Trade Random Price Stock
Number Number Change Price
1 .21 -1/8 22 7/8
2 .84 +1/8 23
3 .07 -3/8 22 5/8
4 .30 0 22 5/8
5 .94 +3/8 23
6 .57 0 23
7 .57 0 23
8 .19 -1/8 22 7/8
9 .84 +1/8 23
10 .84 +1/8 23 1/8

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 Example: Dynogen, Inc.

 Theoretical Results and Observed Results

Based on the probability distribution, the expected
price change per trade can be calculated by:
(.08)(-3/8) + (.04)(-1/4) + (.16)(-1/8) + (.40)(0)
+ (.20)(1/8) + (.06)(1/4) + (.04)(3/8) + (.02)(1/2) = +.005
The expected price change for 10 trades is (10)
(.005) = .05. Hence, the expected stock price after 10
trades is 23 + .05 = 23.05.
Compare this ending price with the spreadsheet
simulation and “manual” simulation results on the
previous slides.

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 Inventory Example: Shelly’s Supermarket

Shelly's Supermarket has just installed a postage

stamp vending machine. Based on one month of
operation, Shelly's estimates the number of postage
stamps sold per day can be approximated by the
following distribution:
 
Number Sold Per Day Probability
20 .10
30 .15
40 .20
50 .25
60 .20
70 .10

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 Inventory Example: Shelly’s Supermarket

Shelly's makes a $.04 profit per postage stamp. The

vending machine holds 230 stamps and it costs Shelly's
$4.00 in labor to fill the machine.
Shelly's will fill the machine at the beginning of
every 5th day. Conduct a 20-day simulation and
determine the expected profit per day.
Assume the machine must be filled on the first day.

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 Inventory Example: Shelly’s Supermarket

The set of random numbers corresponding to each

sales level is:
Number Sold Random
Per Day Probability Numbers
20 .10 .00 but less than .10
30 .15 .10 but less than .25
40 .20 .25 but less than .45
50 .25 .45 but less than .70
60 .20 .70 but less than .90
70 .10 .90 but less than 1.0
Use the following stream of random numbers:
.71, .95, .83, .44, .34, .49, .88, .56, .05, .39,
.75, .12, .03, .59, .29, .77, .76, .57, .15, .53

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 Inventory Example: Shelly’s Supermarket

Filling Every 5th Day Number Profit

of Stamps From Cost of
Random Left In Sale of Refilling Daily
Day Number Demand Machine Stamps Machine Profit
1 .71 60 170 2.40 4.00 -1.60
2 .95 70 100 2.80 -- 2.80
3 .83 60 40 2.40 -- 2.40
4 .44 40 0 1.60 -- 1.60
5 .34 40 0 0 -- 0
6 .49 50 180 2.00 4.00 -2.00
7 .88 60 120 2.40 -- 2.40
8 .56 50 70 2.00 -- 2.00
9 .05 20 50 .80 -- .80
10 .39 40 10 1.60 -- 1.60
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 Inventory Example: Shelly’s Supermarket

Filling Every 5th Day Number Profit

of Stamps From Cost of
Random Left In Sale of Refilling Daily
Day Number Demand Machine Stamps Machine Profit
11 .75 60 170 2.40 4.00 -1.60
12 .12 30 140 1.20 -- 1.20
13 .03 20 120 .80 -- .80
14 .59 50 70 2.00 -- 2.00
15 .29 40 30 1.60 -- 1.60
16 .77 60 170 2.40 4.00 -1.60
17 .76 60 110 2.40 -- 2.40
18 .57 50 60 2.00 -- 2.00
19 .15 30 30 1.20 -- 1.20
20 .53 50 0 1.20 -- 1.20
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 Inventory Example: Shelly’s Supermarket

 Summary: Filling Every 5th Day

Total profit for 20 days = $19.20
Expected profit per day = 19.20/20 = $0.96

Would filling every 4th day be more profitable?

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 Inventory Example: Shelly’s Supermarket

Filling Every 4th Day Number Profit

of Stamps From Cost of
Random Left In Sale of Refilling Daily
Day Number Demand Machine Stamps Machine Profit
1 .71 60 170 2.40 4.00 -1.60
2 .95 70 100 2.80 -- 2.80
3 .83 60 40 2.40 -- 2.40
4 .44 40 0 1.60 -- 1.60
5 .34 40 190 1.60 4.00 -2.40
6 .49 50 140 2.00 -- 2.00
7 .88 60 80 2.40 -- 2.40
8 .56 50 30 2.00 -- 2.00
9 .05 20 210 .80 4.00 -3.20
10 .39 40 170 1.60 -- 1.60
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 Inventory Example: Shelly’s Supermarket

Filling Every 4th Day Number Profit

of Stamps From Cost of
Random Left In Sale of Refilling Daily
Day Number Demand Machine Stamps Machine Profit
11 .75 60 110 2.40 -- 2.40
12 .12 30 80 1.20 -- 1.20
13 .03 20 210 .80 4.00 -3.20
14 .59 50 160 2.00 -- 2.00
15 .29 40 120 1.60 -- 1.60
16 .77 60 60 2.40 -- 2.40
17 .76 60 170 2.40 4.00 -1.60
18 .57 50 120 2.00 -- 2.00
19 .15 30 90 1.20 -- 1.20
20 .53 50 40 2.00 -- 2.00
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 Inventory Example: Shelly’s Supermarket

 Summary: Filling Every 4th Day

Total profit for 20 days = $17.60
Expected profit per day = 17.60/20 = $0.88

The simulation results suggest that Shelly

should fill the stamp machine very 5th day, rather
than every 4th day.

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 Example: Mark Koff’s Process

Mark Koff is a specialist at repairing large metal-

cutting machines that use laser technology. His repair
territory consists of the cities of Austin, San Antonio,
and Houston. His day-to-day repair assignment
locations can be modeled as a Markov process. The
transition matrix is shown on the next slide.

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 Example: Mark Koff’s Process

This Day’s Next Day's Location

Location Austin San Antonio Houston
Austin .60 .15 .25
San Antonio .20 .75 .05
Houston .15 .05 .80

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 Example: Mark Koff’s Process

 Random Number Mappings

Currently in Currently in Currently in

Austin San Antonio Houston
Next-Day Random Next-Day Random Next-Day Random
Location Numbers Location Numbers Location Numbers
Austin .00 < .60 Austin .00 < .20 Austin .00 < .
15
San Ant. .60 < .75 San Ant. .20 < .95 San Ant. .15 < .
20
Houston .75 < 1.0 Houston .95 < 1.0 Houston .20 <
1.0

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 Example: Mark Koff’s Process

Assume Mark is currently in Houston. Simulate where

Mark will be over the next 16 days. What percentage
of time will Mark be in each of the three cities?
Use the following random numbers:
.93, .63, .26, .16, .21, .26, .70, .55,
.72, .89, .49, .64, .91, .02, .52, .69

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 Example: Mark Koff’s Process

 Simulation Worktable
Starting in Houston
Random Day's Random Day's
Day Number Location Day Number Location
1 .93 Houston 9 .72 San Ant.
2 .63 Houston 10 .89 San Ant.
3 .26 Houston 11 .49 San Ant.
4 .16 San Ant. 12 .64 San Ant.
5 .21 San Ant. 13 .91 San Ant.
6 .26 San Ant. 14 .02 Austin
7 .70 San Ant. 15 .52 Austin
8 .55 San Ant. 16 .69 San Ant.

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 Example: Mark Koff’s Process

Repeat the simulation with Mark currently

in Austin. Use the following random numbers:
.13, .08, .60, .13, .68, .40, .40, .27,
.23, .64, .36, .56, .25, .88, .18, .74
Compare the percentages with those found with
Mark starting in Houston.

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 Example: Mark Koff’s Process

 Simulation Worksheet
Starting in Austin
Random Day's Random Day's
Day Number Location Day Number Location
1 .13 Austin 9 .23 San Ant.
2 .08 Austin 10 .64 San Ant.
3 .60 San Ant. 11 .36 San Ant.
4 .13 Austin 12 .56 San Ant.
5 .68 San Ant. 13 .25 San Ant.
6 .40 San Ant. 14 .88 San Ant.
7 .40 San Ant. 15 .18 Austin
8 .27 San Ant. 16 .74 San Ant.

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 Example: Mark Koff’s Process

 Simulation Summary
Starting in Houston
Austin = 2/16 = 12.50%
San Antonio = 11/16 = 68.75%
Houston = 3/16 = 18.75%
Starting in Austin
Austin = 4/16 = 25%
San Antonio = 12/16 = 75%
Houston = 0/16 = 0%

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 Waiting Line Example: Wayne Airport

Wayne International Airport primarily serves

domestic air traffic. Occasionally, however, a
chartered plane from abroad will arrive with
passengers bound for Wayne's two great amusement
parks, Algorithmland and Giffith's Cherry Preserve.
Whenever an international plane arrives at the
airport the two customs inspectors on duty set up
operations to process the passengers.

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 Waiting Line Example: Wayne Airport

Incoming passengers must first have their

passports and visas checked. This is handled by one
inspector. The time required to check a passenger's
passports and visas can be described by the
probability distribution on the next slide.

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 Waiting Line Example: Wayne Airport

Time Required to
Check a Passenger's
Passport and Visa Probability
20 seconds .20
40 seconds .40
60 seconds .30
80 seconds .10

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 Waiting Line Example: Wayne Airport

After having their passports and visas checked,

the passengers next proceed to the second customs
official who does baggage inspections. Passengers
form a single waiting line with the official inspecting
baggage on a first come, first served basis. The time
required for baggage inspection follows the probability
distribution shown on the next slide.

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 Waiting Line Example: Wayne Airport

Time Required For

Baggage Inspection Probability
No Time .25
1 minute .60
2 minutes .10
3 minutes .05

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 Waiting Line Example: Wayne Airport

 Random Number Mapping

Time Required to
Check a Passenger's Random
Passport and Visa Probability Numbers
20 seconds .20 .00 < .20
40 seconds .40 .20 < .60
60 seconds .30 .60 < .90
80 seconds .10 .90 < 1.0

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 Waiting Line Example: Wayne Airport

 Random Number Mapping

Time Required For Random

Baggage Inspection Probability Numbers
No Time .25 .00 < .25
1 minute .60 .25 < .85
2 minutes .10 .85 < .95
3 minutes .05 .95 < 1.0

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 Waiting Line Example: Wayne Airport

 Next-Event Simulation Records

For each passenger the following information must
be recorded:
• When his service begins at the passport control
inspection
• The length of time for this service
• When his service begins at the baggage inspection
• The length of time for this service

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 Waiting Line Example: Wayne Airport

 Time Relationships
Time a passenger begins service
by the passport inspector
= (Time the previous passenger started passport service)
+ (Time of previous passenger's passport service)

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 Waiting Line Example: Wayne Airport

 Time Relationships
Time a passenger begins service
by the baggage inspector
( If passenger does not wait in line for baggage
inspection)
= (Time passenger completes service
with the passport control inspector)
(If the passenger does wait in line for baggage
inspection)
= (Time previous passenger completes
service with the baggage inspector)

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 Waiting Line Example: Wayne Airport

 Time Relationships
Time a customer completes service
at the baggage inspector
= (Time customer begins service with baggage
inspector) + (Time required for baggage inspection)

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 Waiting Line Example: Wayne Airport

A chartered plane from abroad lands at Wayne

Airport with 80 passengers. Simulate the processing
of the first 10 passengers through customs.
Use the following random numbers:
For passport control:
.93, .63, .26, .16, .21, .26, .70, .55, .72, .89
For baggage inspection:
.13, .08, .60, .13, .68, .40, .40, .27, .23, .64

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 Waiting Line Example: Wayne Airport

 Simulation Worksheet (partial)

Passport Control Baggage Inspections
Pass. Time Rand. Serv. Time Time Rand. Serv. Time
Num. Begin Num. Time End Begin Num. Time End
1 0:00 .93 1:20 1:20 1:20 .13 0:00 1:20
2 1:20 .63 1:00 2:20 2:20 .08 0:00 2:20
3 2:20 .26 :40 3:00 3:00 .60 1:00 4:00
4 3:00 .16 :20 3:20 4:00 .13 0:00 4:00
5 3:20 .21 :40 4:00 4:00 .68 1:00 5:00

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 Waiting Line Example: Wayne Airport

 Simulation Worksheet (continued)

Passport Control Baggage Inspections
Pass. Time Rand. Serv. Time Time Rand. Serv. Time
Num. Begin Num. Time End Begin Num. Time End
6 4:00 .26 :40 4:40 5:00 .40 1:00 6:00
7 4:40 .70 1:00 5:40 6:00 .40 1:00 7:00
8 5:40 .55 :40 6:20 7:00 .27 1:00 8:00
9 6:20 .72 1:00 7:20 8:00 .23 0:00 8:00
10 7:20 .89 1:00 8:20 8:20 .64 1:00 9:20

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 Waiting Line Example: Wayne Airport

 Explanation
For example, passenger 1 begins being served by
the passport control inspector immediately. His service
time is 1:20 (80 seconds) at which time he goes
immediately to the baggage inspector who waves him
through without inspection.
Passenger 2 begins service with passport inspector
1:20 minutes (80 seconds) after arriving there (as this
is when passenger 1 is finished) and requires 1:00
minute (60 seconds) for passport inspection. He is
waved through baggage inspection as well.
The process continues in this manner.

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 Waiting Line Example: Wayne Airport

 Question
How long will it take for the first 10 passengers to
clear customs?
 Answer
Passenger 10 clears customs after 9 minutes and
20 seconds.

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 Waiting Line Example: Wayne Airport

 Question
What is the average length of time a customer
waits before having his bags inspected after he clears
passport control? How is this estimate biased?

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 Waiting Line Example: Wayne Airport

 Answer
For each passenger calculate his waiting time:
(Baggage Inspection Begins) - (Passport Control
Ends)
= 0+0+0+40+0+20+20+40+40+0 = 120 seconds.
120/10 = 12 seconds per passenger
This is a biased estimate because we assume
that the simulation began with the system empty.
Thus, the results tend to underestimate the average
waiting time.

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 Other Simulation Issues

 Computer Implementation
 Verification and Validation
 Advantages and Disadvantages
of Using Simulation

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 Computer Implementation

 Spreadsheet Add-Ins
 The use of spreadsheets for simulation has grown
rapidly in recent years.
 Two popular spreadsheet add-in packages are
Crystal Ball and @Risk.
 Spreadsheets are generally limited to smaller, less
complex systems.

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 Computer Implementation

 Special-Purpose Simulation Packages

 A variety of special-purpose simulation packages
are available, including GPSS, SIMSCRIPT,
SLAM, and Arena.
 These packages have built-in simulation clocks,
simplified methods for generating probabilistic
inputs, and procedures for collecting and
summarizing the simulation output.
 These packages enable analysts to simplify the
process of developing and implementing the
simulation model.

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 Computer Implementation

 General-Purpose Computer Programming Languages

 Simulation models can also be developed using
programming languages such as BASIC,
FORTRAN, PASCAL, C, and C++.
 The disadvantage of using these languages is that
special simulation procedures are not built in.
 Usually, it takes many lines of computer code
written in, say, BASIC, to perform the tasks
performed by a single command in a special-
purpose package.

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 Model Verification and Validation

 Verification and validation of both the model and the

method used by the computer to carry out the
calculations is extremely important.
 Models which do not reflect real world behavior
cannot be expected to generate meaningful results.
 Likewise, errors in programming can result in
nonsensical results.

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 Model Verification and Validation

 Validation is generally done by having an expert

review the model and the computer code for errors.
 Ideally, the simulation should be run using actual past
data.
 Predictions from the simulation model should be
compared with historical results.

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 Advantages of Using Simulation

 Among the advantages of simulation is the ability to

gain insights into the model solution which may be
impossible to attain through other techniques.
 Also, once the simulation has been developed, it
provides a convenient experimental laboratory to
perform "what if" and sensitivity analysis.

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 Disadvantages of Using Simulation

 A large amount of time may be required to develop

the simulation.
 There is no guarantee that the solution obtained will
actually be optimal.
 Simulation is, in effect, a trial and error method of
comparing different policy inputs.
 It does not determine if some input which was not
considered could have provided a better solution for
the model.

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 End of Chapter 12

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in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 63