BU.520.

601
Decision Models
Simulation

Summer 2013

Simulation BU.520.601 1
Simulation
Simulation Simulation
Simulation Process
Process
Many definitions.
It is the process of studying the
behavior of a real system using a
computer-based model that
replicates the behavior of that
system.
Used in situations involving
probabilistic elements (e.g.
random arrivals, service times
and process yields)
Used in situations where the
complexity or the size of the
problem makes it difficult to use
optimizing models.
Useful in both service or
manufacturing systems.

Simulation BU.520.601 2
Simulation
Simulation characteristics
characteristics
In a simulation model we have transactions (customers, cars, ..)
and events (arrivals, receiving service, departure,..).
When probability distributions are associated with events, we
use a method called random deviate generation to get
numbers from the probability distribution to simulate events.
Timing of event may or may not be important in a simulation.
For simulation of a warehouse operation, if inventory is charged
on items at the end of the month, we do not need to know precise
timing of withdrawal of items. We only need to know how many
items were withdrawn during the month.
For simulation of toll booths, we need timings of two types of
events when each car arrives and how long it takes to pay.

When time is involved, simulation may be done by changing

simulation clock in fixed increment or by changing clock from one
event to the next (this is the preferred method).

Simulation BU.520.601 3
Simulation characteristics..cont
Simulation is not an optimization tool, rather we try to
establish values of performance measures to arrive at better
decision making. Here is an example.
Suppose we would like improve customer satisfaction at a bank
drive-in facility. We study arrival patterns, service times etc., and
simulate the operation with one drive-in window, with two and
may be with three drive-in windows.
Obviously three windows will be most satisfactory from the customer
point of view. But then we take into account the cost (initial and
operating) and other factors to make the final decision.

We will use EXCEL for some simple simulation exercises.

In EXCEL we will use a function RAND() quite frequently. This

function is volatile (it recalculates all the time). You
should disable automatic calculations (switch to
manual). Press F9 key and all values are recalculated.

Simulation BU.520.601 4
Ex. 11 Simulate the tossing of a coin.
Ex.
Model construction: No simulation clock is involved
Each transaction will be the toss of a coin. We will generate 500
transactions (an arbitrary decision).
We will assume that the coin is fair. The random variable X
takes two values (0, 1 for T and H) with equal probabilities.

To generate of a transaction, we need a very simple formula.

Generate a random number (RN).
If RN < 0.5, its a head; otherwise its a tail.
In Excel, we will use the following formula in 500 cells
=IF(RAND()<0.5,"H","T).

Performance measure: We will compute the probability of

tails based on our simulation to see if it is close to 0.5.

Simulation BU.520.601 5
Ex. 1.. Excel: Simulate the tossing of a coin.
Ex. 1..

Simulation BU.520.601 6
Generating
Generating random
random deviates
deviates (variates)
(variates)
For every probability distribution, as the variable X goes the
minimum value to the maximum value, the cumulative probability
increases from 0 to 1.
Random number generators produce numbers between 0 to 1
(uniform distribution). Thus for any value of a random number,
there is one matching point on the cumulative distribution of X.
We match the value and generate X.
RAND() generates a random number (say RN, 0 RN < 1).
function automatically.

Discrete
Discrete uniform
uniform distribution
distribution
For the discrete uniform
distribution , when X varies
between integers A and B, Excel
has a special function
= RANDBETWEEN(A, B). A A+1 B-
1 B X
Simulation BU.520.601 7
Empirical
Empirical distribution
distribution We need cumulative probabilities.

Demand: X 300 400 500 600

Pr(X) 0.3 0.4 0.2 0.1 The logic is simple. We match
RN with cumulative probability.
F(X) 0.3 0.7 0.9 1.0
If RN < 0.3, X = 300.
If 0.3 RN < 0.7, X = 400.
If 0.7 RN < 0.9, X = 500.
If 0.90 RN < 1.0, X = 600

1. F(X
0 )
Suppose we pick RN = 0.632.
0.632

300 400 500

0. 600
0 X
We get corresponding X value (= 400).

Simulation BU.520.601 8
 F(X) 0.3 0.7 0.9 1.0
Using
Using LOOKUP
LOOKUP Demand: X 300 400 500 600
Pr(X) 0.3 0.4 0.2 0.1
What is the value
of X if RN = 0.632?
Suppose we use
HLOOKUP to find
1. F(X
demand corresponding
0 )
to F(X) = 0.632
0.632 We need to use the
function without exact
match.
300 400 500 But since 0.3 < 0.632 <
0. 600
0.7, Excel will match the
0 X value
To avoid this, we need to replace equal
F(X) withto 300.variable
some
G(X), in which F(X) values are shifted to the right.

G(X) 0.0 0.3 0.7 0.9

Demand: X 300 400 500 600

Simulation BU.520.601 9
Ex.
Ex. 22 Ships arrive in the night at Arrival distribution
a facility with two docks. X 0 1 2 3 4 5
If a dock is available in the morning, Pr(X) 0.30 0.30 0.20 0.10 0.05 0.05
it is assigned to a waiting ship for the whole day and the ship leaves
in the evening. If a dock cannot be assigned, there is a fee of $10,000
per day per ship. Simulate the operation and estimate the
annual fee.
Model construction: We will start with a flow chart
Population

Dock 1
Arrival Queue Departure
Dock 2
Our model is simpler because both docks take 1 day to process.

Simulation BU.520.601 10
Ex. 2.. Dock simulation
Ex. 2..
Population

Arrival Docks: Departure

Queue Service
1 or 2
Every day, we will generate new arrivals with HLOOKUP. Assume
ship arrive between midnight and 6 a.m. These ships will be
added to the queue.
We will assign up to 2 ships from the queue (assumed FIFO
First In First Out) and calculate remaining ships waiting. These
waiting ships will incur fee for that day.
We will simulate the operation of a year and calculate the fee.
We can replicate the experiment many times.

Performance measure: We will compute the annual fee.

Simulation BU.520.601 11
Ex. 2 Excel: Dock simulation
Ex. 2

Run for 365 days

Simulation generated

Simulation BU.520.601 12
Ex. 2. Excel: Dock simulation
Ex. 2.

Frequency of ships waiting

250

200
No of days 150

100

50

0
0 1 2 3 4 5 6 7 >7
No of ships

Simulation BU.520.601 13
Ex. 2.. Excel: Dock simulation
Ex. 2..
Arrivals are generated
with HLOOKUP.

Simulation BU.520.601 14
 Random
Random Deviates:
Deviates: Continuous
Continuous distributions
distributions
Suppose X has continuous probability
distribution (range 100 to 500) and we
1. can find the cumulative distribution F(X).
0 F(X Every F(X) varies between 0 and 1.
0.5 )
2

0. 100 26 X
0 500
4 We can use random numbers (RN) to
generate X values because RN also
vary between 0 and 1 and there is a
one to one correspondence.

Suppose we pick RN = 0.52.

We can find corresponding X value (say 264).

Simulation BU.520.601 15
 Random
Random Deviates
Deviates Triangular distribution

Uniform distribution

A X B C
Triangular:
A X B
Let p = (B - A) / (C A)
Uniform: =IF(RAND() p, X, Y) where
= A + RAND()*(B A) X = A + SQRT(RAND() * (C A) * (B A)),
Y = C - SQRT((1-RAND()) * (C A) * (C
B))
Normal distribution = NORMINV(RAND(),Mean, Std. dev.)
Log-Normal = LOGINV(RAND(),Mean, Std. dev.)
Exponential distribution = (-Mean)*LN(RAND())

Simulation BU.520.601 16
Ex. 33 Retirement Planning
Ex.
You are 30 years old, and would like to invest
3000 dollars at the end of each year from
now till you reach 60.
Assume interest paid to be N(12, 2) meaning
normally distributed with mean = 12% and
std. dev. = 2%; interest is paid at the end of
year.
You would like to estimate probability of
reaching the target of one million dollars at
the age 60.
Age Investment value
You would like to know chances of achieving
30 if you
the target X30increase
= 3000 the annual amount
invested.
31 X31 = 3000 + X30 +
interest on X30
Simulation 32 X32 = 3000
BU.520.601 + X
31 + 17
Ex.
Ex. 3..
3..

=B12*(1+NORMINV(RAND(), Mean_R,STDV_R))
+ Annual_contr

Simulation BU.520.601 18
Ex. 3 Retirement Planning sensitivity analysis
Ex. 3
Effect of changing contribution on the probability of
achieving the desired outcome.

Simulation BU.520.601 19
Ex.
Ex. 44 An IPO is to be launched
with the opening price
expected to be from the
distribution shown.
Opening Stock Price
X 10 11 12 13 14 15
Pr(X) 0.10 0.20 0.30 0.20 0.10 0.10

For the next five years, the stock price is expected to increase by an
amount given by a lognormal distribution with mean of 1.5% and
standard deviation of 0.5% provided the company does not fail. The
probability of failure is 40%, 30%, 20%, 20% and 10% during the next
five years.

Estimate the following using simulation:

(a)Price of the stock at the end of the 5 year period
assuming the company has not failed.
(b)Probability of survival at the end of 5 years.

Theoretical answer to part (b) is

(1 0.4) * (1 0.3) * (1 0.2) * (1 0.2) * (1 0.1) = 0.24192

Simulation BU.520.601 20
Ex.
Ex. 4..
4.. IPO Launching

Simulation BU.520.601 21
 IPO Launching Ex.
Ex. 4
4

How
?Count failures
through Y1, then
Y2 Y1, etc.

Fail in Year 4:
=IF(K3="Y","Y",IF(RAND()<F$15,"Y","N"))

22

Simulation BU.520.601
Ex.
Ex. 4.
4. IPO Launching

Stock Price in Year 4:

=IF(L4="N",Q4*(1+0.01*LOGINV(RAND(),Log_mean, Log_Stdv)),0)

23

Simulation BU.520.601
Time
Time Based
Based Event
Event Oriented
Oriented Simulation
Simulation
We will consider the following:
Transactions (customers) enter the system in a single line and are
processed at a single facility (server) on a FIFO basis also called
First Come First Served (FCFS).

Population

Arrival Queue Service Departure

We will consider several different situations. First, the dock example

appeared to have same flow chart but it was somewhat different.
Docks were open only during day time (say from 7). This means
ships arrive in the night could be considered as arriving at 7 and
using the docks for fixed amount of time. Each row generated new
arrivals for a new day.

Simulation BU.520.601 24
 A
A simple
simple example
example
Population

Arrival Queue Service Departure

A machine take exactly 5 minutes to process a

job. Our work load is only 10 jobs per hour. So
we dont need simulation, we can simply
schedule a job every 6 minutes. M1
5
Job 1 Job 2 Job 3 min
M1
5 11 17
There is an idle time of 1 minute after every
job. Machine utilization is (5/6)* 100 = 83.3%.
There will be no queue.
Simulation BU.520.601 25
 Example
Example 55 M1
Population 5
min
Arrival Queue Service Departure

We are now going to consider different arrival

and service time distributions.
Case Arrival distribution Service time distribution
A Uniform (discrete) 1 to Fixed ( 5 minutes)
11 min
B Uniform (continuous) Fixed ( 5 minutes)
C 1 to 11 minutes Triangular (1, 5, 9) minutes
D Poisson: 10 Exponential (Average
arrivals/hour (time service time 5 minutes)
Note between
that the arrival 6
average time between arrival is
6
minutes exponential)
minutes and average service time is 5 minutes.
Simulation BU.520.601 26
Arrival When an arrival
Arrival Flow
Flow chart
chart
event happens, the
Arrival following is checked
at that point in time.

SS=1 SS=0
SS?

Join Q Enter service

Set SS = 1
Add 1 to Q
Set next Dep. Time

Determine next arrival time

Server
Status (SS)
Q Queue
SS = Idle
Dep. Departure
0
Time Time
SS = Busy
Simulation BU.520.601 27
Departure
Departure Flow
Flow chart
chart
When a departure
event happens, the
Departure
following is checked
at that point in time.
Q not Q
Q. Status
empty Empty
Remove first Tr. From Q , Set SS = 0
start service & set Dep. Time
Shorten Q by 1

Q Queue
SS = 0 Server Status:
Idle
Tr. Transaction
Simulation BU.520.601 28
 Example
Example 5..
5.. Single server system simulation 4 cases

Case Arrival distribution Service time distribution

A Uniform (discrete) 1 to Fixed ( 5 minutes)
11 min
B Poisson: 10 Exponential (Average time
arrivals/hour 5 min.)

Model Parameters: Each model may have many parameters.

Examples are: arrival and service rates, capacities, etc.
Statistics of interest /performance measures:
Statistics on performance measures can be useful in validating the
model and for decision making. Some examples.
Whats the average waiting time? Maximum waiting time?
What is the maximum queue length? What is the server utilization?
How many people had to wait in queue before using the server?
How many people waited more than X minutes?

Simulation BU.520.601 29
Example
Example 5
5 Single server system simulation
When the simulation starts at time zero, the system is empty. Value of
a performance measure such as server utilization keeps on changing
as time progresses.
After some time, when the process
reaches a steady state, value of the
performance measure comes close to the Expected
Parameter value
expected value of that measure.
In all four cases since average time
between arrivals is 6 minutes and the Parameter
average service time (when the server is value
busy) is 5 minutes. The server utilization
will stabilize at about 83% (=100*75/90). 0 t Time

For better estimate of the performance measure values, we generally

chop off initial observations (up to period t). For our example, we
will start collecting data from observation 201 (to 1200).

Simulation BU.520.601 30
 Example Arrival Service time
Example 5A
5A
Uniform (discrete) 1 to Fixed ( 5
11 min minutes)

How did we get

numbers in the table
below?

Simulation BU.520.601 31
Example Arrival Service time
Example 5A..
5A..
Uniform (discrete) 1 to Fixed ( 5
11 min minutes)

Simulation BU.520.601 32
Example 5B Arrival
Example 5B Service time
Poisson: 10 / Exponential: 5 min
hour

When the number of

arrivals is Poisson
(with 10 units / hr.),
the time between
arrivals is exponential
(with average time =
6 minutes).

Simulation BU.520.601 33
Example 5D.. Arrival
Example 5D.. Service time
Poisson: 10 / Exponential: 5 min
hour

The graph here shows that it is not easy to determine when steady
state may be reached (how many observations to chop off), nor do
we know how many total observations to collect in a simulation
run or how many time to replicate.

Simulation BU.520.601 34
 Example
Example 5:
5: Comparison
Comparison

Case Arrival distribution Service time distribution

A Uniform (discrete) 1 to Fixed ( 5 minutes)
11 min
D Poisson: 10 Exponential (Average time
arrivals/hour 5 min.)

A B

Simulation BU.520.601 35
Simulation:
Simulation: general
general comments
comments

One can use visual basic macros within EXCEL.

Risk solver also includes some simulation
capability.
Many specialized simulation languages have
been developed. These can handle even more
complex situations. Examples: AutoMod,
Arena, GASP, GPSS, Promodel, SIMSCRIPT,
Simula.
Many simulation software packages also come
with animation capability (there are even
free ones). This can make a tremendous
impact in visualizing the operations.
One note of caution. Impressive visual display
may give some false impressions even though
data used in the simulation
Simulation BU.520.601 or the simulation
36
 Simulation
Advantages Disadvantages
1. Flexibility. 1. Can be expensive
2. Can handle large and time
and complex consuming.
systems. 2. Does not generate
3. Can answer what- optimal solutions.
if questions. 3. Managers must
4. Does not interfere choose solutions
with the real they want to try
system. (what-if
5. Allows study of scenarios).
interaction among
variables. 4. Each model is
6. Time unique.
compression is
possible.
7. Handles
complications that BU.520.601
Simulation 37
 ATM
ATM Simulation
Simulation 11 vs.
vs. 22
Average number of arrival per hour: 40
(Poison)
Average service time 75 sec. (Exponential)

Simulation BU.520.601 38