MMGT6012

MMGT6012
Business Tools for Management
TOPIC 10: Simulation Modelling

Dr. Matthew Beck
ITLS, Business School
The University of Sydney Page 1

10. Simulation Modelling
We attempt to create copy of an environment:

– Experiment in that pseudo-environment to gather data about different
actions before we implement that behaviour in the real world
Applied experiments fundamental to all sciences:

– Testing of medicine on laboratory animals where the animal responses
simulate human responses
– Driving automobiles on test tracks where the test track simulates the
environment the auto will face
– Training airline pilots in actual cabins with simulated out-of-the-window
displays under simulated conditions

What is Simulation?

What is Simulation?
Our modelling is done in a computer environment:

– Creating and analyzing a digital prototype
– Predict its performance in the real world
Simulation differs to optimisation:

– Fundamental difference lies in the role of decision variables
Consider the following example:

– An airline wants to know how best to assign cabin staff across all the flights
on a particular day so that it minimises labour costs, subject to satisfying
minimum service times and safe working hours

What is Simulation?
In Optimisation Modelling:
– Model parameters are fixed
– We know all numbers of passengers
– We know all flight times
– We know exactly how long it takes to serve each passenger
Because values are fixed we can get an optimal solution:

– Best way to assign cabin staff
– Optimised total cost (objective function)
– How much slack in the constraints

What is Simulation?
In Simulation Modelling:
– Model parameters are uncertain
– A range of different passenger numbers is possible
– Flight times may differ to schedule for a variety of reasons
– Service time per passenger may have some variance around the average
We cannot calculate a single optimal solution:

– There are too many possible combinations of outcomes

What is Simulation?
We provide a potential solution and simulate performance:

– One possible allocation of staff
– Get one possible set of passenger numbers
– Get one possible set of flight times
– Get one possible set of service times
Identify different performance measures of interest:

– Total costs of labour
– Total time for how long passengers took to be served
– Total time staff are working for

What is Simulation?
Assess how that potential solution performs for that one outcome:
– Repeat the process many times so we see how it performs in many different
set of potential outcomes
Look at the overall distribution of how that solution performs:

– Average costs of labour
– Average time for how long passengers took to be served
– Average time staff are working for

What is Simulation?
We see average outcomes:

– But we can also calculate variability around that average
– Best case outcomes
– Worst case outcomes
Judge the sensitivity to the system by changing inputs:

– What happens when we add two more staff to the model
– What happens if passenger numbers increase by 10%

What is Simulation?
Optimisation Model
– Decision variables are outputs
– Model provides a set of values for the decision variables that maximises (or
minimises) the value of the objective function
Simulation Model:
– Decision variables are inputs
– The model evaluates the objective function for a particular set of values

Probability Distributions
In optimisation models we provide fixed values:

– A single number for every input into the model
In simulation models we provide a distribution of values:

– A range of possible outcomes with different probabilities for each outcome
There are two types of variables:

– Categorical: Where a limited number of events can occur
– Continuous: An almost infinite number of possible values could occur

We represent uncertainty by assuming different probabilities
A coin toss is a categorical outcome:

– Only two possible outcomes
– Heads or Tails
A discrete distribution:
– Limited number of discrete outcomes
– A uniform distribution (each outcome has the same chance of occurring)

If we toss a coin twice:
What combinations of results are possible?

– Head then Head
– Head then Tail
– Tail then Head
– Tail then Tail
(1) (2)
What is the probability of getting the following number of tails:

Number of Tails Number of Comb. Probability
0
1
2

Cumulative Probability Distributions
What is the probability of getting results within a certain range:

– What is the probability that temperature will be 25-30oC
What is the probability of getting X or <X number of tails:
Number of Tails Probability Cumulative Prob.

0
1
2

We use the properties of distributions to simulate uncertainty:

– Discrete: Limited number of discrete (categorical) outcomes
– Uniform: Each outcome (cont. or cat.) has the same chance of occurring
– Normal: Follows the property of the Normal (68%, 95%, 99% etc)
– Log-Normal: Follows the log of the Normal (useful if X must be more than 0)
– Triangular: Used when you have limited information (min, max, most likely)

Monte Carlo Simulations
We introduce uncertainty to they model via Monte Carlo:
1. Generate a random probability
2. Use that probability to draw from a distribution
3. Use the outcome of the draw as a simulated value
Monte Carlo is part of simulation not a type of simulation model

Example of Monte Carlo (1)
A manager of a computer store is interested in better forecasting

revenue from a particular type of laptop:
– Sells between 0 and 4 laptops every week
– Each laptop retails for $4300
– Uses last 100 weeks of sales history to generate probability distribution
This is an abstraction of reality:

– We only have one uncertain variable
– Once we can generate one uncertainty it is easy to add many more
– The sales of different products that contribute to overall revenue

Sales data over the last 100 weeks suggests this distribution:
PCs Demanded/week Frequency of Probability of

Demand Demand, P(x)
Zero 20
One 40
Two 20
Three 10
Four 10
TOTAL 100

Each probability could be converted to the area of a pie:

Four
10% Zero
20%
Three
10%
Two
20%
One
40%
Think of a roulette wheel:

– When we spin the wheel we don’t know what we will get
– But different outcomes have a different probability of occurring

Now think of numbers around

the outside of the wheel
instead…
There are 20 numbers

assigned to the result of zero
computers:
– Reflects the 20% chance of this
result occurring

Now suppose the manager spins the wheel and gets 39:
39 is in the range of numbers assigned to a result of one laptop




Matt would like to simulate his score on a hole of golf (Par 3) :

– Based on scores from previous rounds he has the following data
Score # Times Probability of Cumulative Range of

Score Probability Random #’s
Hole in One 2
Birdie 7
Par 25
Bogey 11
Double Bogey 3
Triple Bogey 2


From the random number table on previous slide:

– Using the first row as the random number draw
– Simulate the score for 10 different attempts at the hole
Week 1 2 3 4 5 6 7 8 9 10
Random #
Sim. Score

Monte Carlo in Excel
At the end of this topic there are slides for your own benefit:
– We are not explaining these formulas in great detail in the lecture
Please read them and practice them in Excel:

– Note that the Excel for Transport and Logistics Guide goes through each
formula in detail, with worked examples
There is also a very detailed example in the Workbook!

1. Setup the distribution from which to draw:
I set it up like this so the vlookup formula works

2. Setup the random draws and link to the distribution:

3. Setup the tabulation of results:

4. Insert a chart to visualise results:

The Role of Iterations
More iterations (repeated simulations) of a model result in:

– Convergence of unknown variables to their expected value
– Wider interaction of variables across range of possible values
– Better analysis of outlying, low probability events
We only simulate golf scores for ten attempts:

– What if we wanted to increase the number of trial days?

You can just create a longer column of potential scores:
I just copy and pasted the random draw down 1000 rows
You can create a macro:

Macro Master Command
Sub Simulation()
Max_It = Range(“F11").Value
For Iteration = 1 To Max_It
Range(“F12").Value = Iteration
Next Iteration
End Sub

Totalling the Iterations
We have added formulas in range B12:C17:

– These only tabulate the results of the single iteration in J2:J12
We need to collate the results for the 1000 iterations!

– Fortunately we can simply “Record New Macro”.
This means we don’t have to know the specific code, but we do

have to have an idea of what we want to do.

Recording a Macro
We want to record a Macro that copies the individual results:

– Adds them together so we get all the results
– Name the Macro

– Select J2:J12 and copy this range
– Right click on B21 and select paste special
– Choose the Value and Add options
– Stop recording the Macro

Recording a Macro
We want to record a Macro that copies the individual results:

– Adds them together so we get all the results
– Name the Macro (Score)

– Select J2:J12 and copy this range
– Right click on B21 and select paste special
– Choose the Value and Add options

Adjust Master Macro
Sub Simulation()
Score
Next Iteration
End Sub

Recording a Macro
Now record Macro resets the simulation for every new run:
– Name the Macro (Reset)
– Select B21:B26 and press delete

Adjust Master Macro
Sub Simulation()
Reset
Score
Next Iteration
End Sub

Useful Excel Formulae
– Locking a cell reference:
– Copying and pasting formulas in Excel will result in the

equations being changed.
– If you want to avoid this you need to lock the cell reference.
– Change it from a relative to an absolute cell reference.
– To lock a cell reference so that it does not adjust when you

copy it, all you need to do is add dollar signs to the cell
reference
– $A1 = Always reference column A.
– A$1 = Always reference row 1.
– $A$1 = Always reference column A, row 1.

– Generating random numbers:
– =Rand()
– Generates a random number between 0 and 1.
– =RandBetween(X,Y)
– Generates a random number between X and Y.
– =RandBetween(1,100)
– Generates random numbers between 1 and 100.

– Multiplying large amounts of information:
– Use the SUMPRODUCT command:
=sumproduct(A1:A10,B1:B10)
=28001
=(A1*B1)+(A2*B2)+(A3*B3)+…+(10*B10)

– Logic test, or selecting between options:
– =if(logical test, value if true, value if false)

– Logical test – The question we want to ask. Is the value in Column A
larger than the value in Column B?
– Value if true – what do we want displayed if the answer to our question
is “true”? In this example, let’s say we want the answer to be “yes”
– Value if false – what do we want displayed if the answer is “false”? In
this example, let’s say we want “no”.
– How do we build an IF statement?

– =IF(A2>B2,"yes","no")

– Counting cells that meet a certain criteria:
– =COUNTIF(range, criteria)
– In Excel, the CountIf function counts the number of cells in a range, that
meets a given criteria.
– range is the range of cells that you want to count based on the criteria.
– criteria is used to determine which cells to count and how to count them.

– Looking for data and reporting findings back
Value to If you find that value, report the

look for value in this column of data
=VLOOKUP($F2,$A$2:$B$8,2,TRUE)
Look for that value in these True = Find the lowest boundary
rows and columns False = Find the exact match

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Business Tools for Management

TOPIC 10: Simulation Modelling

The University of Sydney Page 1

We attempt to create copy of an environment:

Applied experiments fundamental to all sciences:

The University of Sydney Page 2

The University of Sydney Page 3

Our modelling is done in a computer environment:

Simulation differs to optimisation:

Consider the following example:

The University of Sydney Page 4

Because values are fixed we can get an optimal solution:

The University of Sydney Page 5

We cannot calculate a single optimal solution:

The University of Sydney Page 6

We provide a potential solution and simulate performance:

Identify different performance measures of interest:

The University of Sydney Page 7

Look at the overall distribution of how that solution performs:

The University of Sydney Page 8

We see average outcomes:

Judge the sensitivity to the system by changing inputs:

The University of Sydney Page 9

The University of Sydney Page 10

In optimisation models we provide fixed values:

In simulation models we provide a distribution of values:

There are two types of variables:

The University of Sydney Page 11

We represent uncertainty by assuming different probabilities

A coin toss is a categorical outcome:

The University of Sydney Page 12

If we toss a coin twice:

What combinations of results are possible?

What is the probability of getting the following number of tails:

The University of Sydney Page 14

Cumulative Probability Distributions

What is the probability of getting results within a certain range:

What is the probability of getting X or <X number of tails:

Number of Tails Probability Cumulative Prob.

The University of Sydney Page 15

We use the properties of distributions to simulate uncertainty:

The University of Sydney Page 16

Monte Carlo Simulations

We introduce uncertainty to they model via Monte Carlo:

1. Generate a random probability

2. Use that probability to draw from a distribution

3. Use the outcome of the draw as a simulated value

Monte Carlo is part of simulation not a type of simulation model

The University of Sydney Page 17

Example of Monte Carlo (1)

A manager of a computer store is interested in better forecasting

This is an abstraction of reality:

The University of Sydney Page 18

Example of Monte Carlo (1)

PCs Demanded/week Frequency of Probability of

The University of Sydney Page 19

Example of Monte Carlo (1)

Each probability could be converted to the area of a pie:

Think of a roulette wheel:

The University of Sydney Page 20

Example of Monte Carlo (1)

Now think of numbers around

There are 20 numbers