Simulation Practice Problems

1. Express Mail Staffing

Topics: Simulation, staffing policy

Difficulty: Medium

Martina Petrino is the manager of the New York City “hub” of the U.S. Postal
Service’s Express Mail Division. Each day, all express mail received by 5:00 p.m. at post
offices throughout the New York area is sent to the hub for sorting and subsequent
distribution to other hubs. Martina is reevaluating the size of the sorting staff. Currently,
there are 155 sorters on the staff.
A sorter works an eight hour shift, unless the volume of mail is so high that the
sorter is asked to work overtime. Each sorter can process 250 pieces per hour. The
average daily number of pieces received for processing is 300,000. The actual number
varies considerably and unpredictably from one day to the next. Records kept over the
past year indicate the daily number of pieces to process can be fairly well modeled by a
normal distribution with a mean of 300,000 and a standard deviation of 15,000.
During the regular eight hour shift a sorter’s wages and fringe benefits amount to
$10 per hour. When a day’s mail volume is too high for the staff to process during the
regular eight hour shift, Martina has the staff work overtime until all of the mail is
processed. During overtime a sorter’s wages and fringe benefits amount to $15 per hour.
If the day’s mail volume is less than the total staff can process during the regular eight
hour shift, the entire staff is still paid for the full eight hours.

Find the number of sorters that minimizes average daily cost. In particular, vary the
number of sorters from 135 to 160 in increments of 5. Plot average daily cost versus
number of sorters. (Shelting)

2. Bakery Department Simulation

 Simulation Practice Problems

Topics: Simulation, production and inventory policy

Difficulty: Medium

The bakery department of a large grocery store has started to sell freshly baked
cakes. The manager of the store needs to determine how many cakes to bake each day. If
the demand were known with certainty, the problem would be simple - just bake the
number of cakes to exactly meet the demand for the day. However the demand varies
from day to day, and cannot be predicted in advance. If too few cakes are baked, then
there will be considerable lost revenue and possibly lost customer good will as well. If
too many cakes are baked, there will be leftovers at the end of the day. The store policy is
to reduce the price of these cakes and sell them at a loss the next day.
The manager estimates that each cake costs C = $9.00 to make. This cost includes
the cost of ingredients, labor, overhead, etc. Freshly baked cakes sell for S = $12.00. If
there are any leftovers, they can all be sold the next day as “day-old” items for V = $8.00.
The manager estimates that average demand for freshly baked cakes is 30 cakes per day.
The daily demand for cakes (denoted by D) is random, and the manager feels that a good
model for demand is a normal distribution with a mean of 30 and a standard deviation of
12.
The manager’s decision variable is Q, the number of cakes to bake. Currently, the
manager is baking Q = 30 cakes per day, enough to meet the average daily demand. The
actual net profit for the day depends on the particular value of demand for the day. Net
profit can be computed from the following

S * D - C * Q + V * (Q - D) if D  Q (excess supply),or
NETPROFIT = 
S * Q - C * Q if D > Q (shortage)
In the excess supply case, the net revenue is income from cake sales (S * D)
minus the baking cost (C * Q) plus the salvage value of unsold cakes (V * (Q - D)). In the
case of a shortage, net revenue is just the income (S * Q) minus the baking cost (C * Q).
 Simulation Practice Problems

a) Find Q that maximizes average daily net profit. In particular, vary Q from 18 to 42 in
increments of 4. Plot average daily net profit versus the quantity to bake. What would
you recommend?

b) The store is worried that selling day-old cakes is hurting its reputation of selling only
high quality products. Management has decided to discontinue the practice of selling day-
old cakes, and will now throw them away (or give them away free to employees).
Assume that the demand for freshly baked cakes remains unchanged. Estimate the new
optimal Q and the new optimal expected profit.
 Simulation Practice Problems

3. Mail Order Problem

Topics: Simulation, strategy evaluation
Difficulty: Medium

Montague Bay is a retailer which sells clothing by mail order. An important question for
the company is when to strike a customer from their mailing list. At present, MB strikes a
customer from their mailing list if a customer fails to order from six consecutive catalogs.
The company wants to know whether striking a customer from their mailing list after a
customer fails to order from four consecutive catalogs will result in a higher profit per
customer. The following data are available:
1) If a customer placed an order the last time she received a catalog, then there is a
20% chance she will order from the next catalog.
2) If a customer last placed an order “one catalog ago”, there is a 16% chance that
she will order from the next catalog she receives.
3) If a customer last placed an order “two catalog ago”, there is a 12% chance that
she will order from the next catalog she receives.
4) If a customer last placed an order “three catalogs ago”, there is an 8% chance that
she will order from the next catalog she receives.
5) If a customer last placed an order “four catalogs ago”, there is a 4% chance that
she will order from the next catalog she receives.
6) If a customer last placed an order “5 catalogs ago”, there is a 2% chance that she
will order from the next catalog she receives.
It costs $1 to produce and send a catalog, and the average profit per customer order is
$15. Consider a customer that has just placed and order. To maximize the expected profit
from such a customer, should MB cancel this customer after four non-orders or after six
non-orders?