1. OPERATIONS MANAGEMENT: Creating Value Along the Supply Chain,
Canadian Edition
Robert S. Russell, Bernard W. Taylor III, Ignacio Castillo, Navneet Vidyarthi
CHAPTER 13 SUPPLEMENT
Operational Decision-Making Tools:
Simulation

2. Lecture Outline Monte Carlo Simulation Computer Simulation with Excel
Areas of Simulation Application

3. Simulation
Mathematical and computer modeling technique for replicating real-world problem situations
Modeling approach primarily used to analyze probabilistic problems
It does not normally provide a solution; instead it provides information that is used to make a decision
Physical simulation
Space flights, wind tunnels, treadmills for tires
Mathematical-computerized simulation
Computer-based replicated models

4. Monte Carlo Simulation
Select numbers randomly from a probability distribution
Use these values to observe how a model performs over time
Random numbers each have an equal likelihood of being selected at random

5. Probability Distribution of Demand
LAPTOPS DEMANDED FREQUENCY OF PROBABILITY OF
PER WEEK, x DEMAND DEMAND, P(x)

6. Roulette Wheel of Demand90 80 60 20
x = 2
x = 0
x = 4
x = 3
x = 1

7. Generating Demand from Random Numbers
DEMAND, RANGES OF RANDOM NUMBERS,
x r
0 0-19
r = 39

8. Random Number Table

9. 15 Weeks of Demand WEEK r DEMAND (x) REVENUE (S) 1 39 1 4,300
,300
,600
,600
,600
,300
,900
,200
,300
,200
,300
,200
,200
,600
 = 31 $133,300

10. Computing Expected Demand
+ (0.10)(3) + (0.10)(4)
= 1.5 laptops per week
Difference between 1.5 and 2.07 is due to small number of periods analyzed (only 15 weeks)
Steady-state result
average result which stays constant after enough trials
Estimated average demand = 31/15 = 2.07 laptops/week

11. Random Numbers in Excel

12. Simulation in Excel Enter this formula in G6 and copy to G7:G20
Enter “=4300*G6” in H6 can copy to H7:H20
Generate random number for cells F6:F20 with the formula “=RAND()” in F6 and copying to F7:F20
=AVERAGE(G6:G20)

13. Spreadsheet “frozen” at row 16 to show first 10 weeks and last 6
Simulation in Excel
Spreadsheet “frozen” at row 16 to show first 10 weeks and last 6

14. Decision Making with Simulation
=G6*50 entered into cell L6 and copied to L7:L105
This formula entered in G7 and copied to G8:G105
=VLOOKUP (F6,LOOKUP,2) in H6 and copied to H7:H105
Shortages computed by entering =MIN(G6-H6,0) in I6 and copying to I7:I105

15. Decision Making with Simulation
New formula for two laptops ordered per week.

16. Areas of Simulation Application
Waiting Lines/Service
Complex systems for which it is difficult to develop analytical formulas
Determine how many registers and servers are needed to meet customer demand
Inventory Management
Traditional models make the assumption that customer demand is certain
Simulation is widely used to analyze JIT without having to implement it physically

17. Areas of Simulation Application
Production and Manufacturing Systems
Production scheduling, production sequencing, assembly line balancing, plant layout, and plant location analysis
Machine breakdowns typically occur according to some probability distributions
Capital Investment and Budgeting
Capital budgeting problems require estimates of cash flows, often resulting from many random variables
Simulation has been used to generate values of cash flows, market size, selling price, growth rate, and market share

18. Areas of Simulation Application
Logistics
Random variables include, distance, transport modes, shipping rates, and schedules
Allows analysis of different distribution channels
Service Operations
Police departments, fire departments, post offices, hospitals, court systems, airports
Complex operations where only simulation can be employed
Environmental and Resource Analysis
Impact of manufacturing plants, waste-disposal facilities, nuclear power plants, waste and population conditions, feasibility of alternative energy sources

19. COPYRIGHT
Copyright © 2014 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.