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Slide 1:

PGDM (Agriculture) PGDM-624 : Simulation


2 Simulation Simulation is one of the most frequently employed management science techniques. Simulation is not an optimization technique. It is a method that can be used to describe or predict how a system will operate given certain choices of controllable inputs and randomly generated probabilistic inputs It is typically used to model random processes that are too complex to be solved by analytical methods.

Steps in Simulation:

3 Steps in Simulation Simulation is a technique that involves setting up a model of real situation and then performing experiments on the model Steps : Observation of a physical system Formulation of a mathematical model Use the mathematical model for predicting the behaviour of the system Testing validity of mathematical model

Advantages of Simulation:

4 Advantages of 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.

Examples : Risk Analysis:

5 Examples : Risk Analysis Risk analysis is the process of predicting the outcome of a decision in the face of uncertainty Portacom manufactures personal computers and related equipment Portacom’s product design group developed a prototype for a new high-quality portable printer

Slide 6:

6 Preliminary marketing and financial analysis provided the following for the first year : Selling price = $249 / unit Administrative cost = $400,000 Advertising cost = $600,000 The cost of a) labor, b) parts, and the c) first year demand for the printer are not known with certainty and are considered probabilistic inputs Analysis Analyze without Simulation and with simulation to understand the expected profit scenarios

Slide 7:

7 At the stage of planning process the best estimates of uncontrollable variables are : Labor Inputs = $45 / unit Labor = $90 / unit First year demand = 15,000 units Profit model for the first year Profit = (249-c1 – c2) x – (400,000 + 600,000) = (249=45-90) 15,000 -1,000,000 = 710,000 c1 = labour cost c2 = parts cost / unit x = first year demand Analysis without Simulation

What – If Analysis:

8 What – If Analysis One approach to risk analysis is what-if analysis. A What-if analysis involves generating values for the probabilistic inputs. Simple What –If approach Approach Labor Cost varies from $ 43 to $ 47 Parts Cost varies from &80 to $100 Demand varies from 1500 to 28,500 Identify the worst and best scenarios

Slide 9:

9 We use what if analysis to evaluate a worst-case and a best-case scenario Worst case scenario c1 = 47, c2 = 100, x=1500 Profit (249-c1-c2) x-1,00,000 = -847,000 Best case C1 = 43, c2 = 80, x=25,500 Profit = 2,591,000 Simple What-If analysis

Monte-carlo Simulation:

10 Monte-carlo Simulation Using simulation to perform risk analysis for the portacom problem is like playing out many what-if scenarios by randomly generating values for the probabilistic inputs Mote-carlo simulation : A method of generating values from a known Probability distribution for the purposes of experimentation.

Probabilistic Inputs:

11 Probabilistic Inputs Labor cost per unit (c1) Parts cost per unit (c2) First year demand (x) To generate values for each probabilistic variable: We must know the probability distribution for each probabilistic input C1 ~ Discrete probability distribution C2 ~ Uniform distribution X ~ Normal distribution Profit = (249-c1 – c2) x – (400,000 + 600,000)

Slide 12:

12 Discrete Probability distribution for Labor cost Labour cost : Probability Distribution Labour cost / unit Probability 43 0.1 44 0.2 45 0.4 46 0.2 47 0.1

Slide 13:

13 Probability distributions for parts cost and Demand for Printer Range of parts cost 80 to 100 / unit Follows Uniform probability distribution Demand : Normal distribution with Mean = 15,000 SD = 4500

Slide 14:

14 Flowchart for the protacom Simulation Model parameters Selling price per unit = 249 Administrative cost = 400,000 Advertising cost = 600,000 Generate labour cost (c 1 ) Generate parts cost (c 2 ) Generate first – year Demand (x) Compute profit Profit= (249-c 1 -c 2 ) x-1,000,000 Next Trial

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