Simulations in Statistics

14-1
Copyright 2010 Pearson Education, Inc. Publishing as Prentice

Hall
Chapter 14
14-2
Hall
Not all real-word problems can be solved by applying a
specific techniques and then performing calculations.

Some situations are too complex to be represented by
precise techniques, and the alternative form of analysis
is simulation.

Simulation
14-3
The Monte Carlo Process
Computer Simulation with Excel Spreadsheets
Simulation of a Queuing System
Continuous Probability Distributions
Statistical Analysis of Simulation Results
Crystal Ball
Verification of the Simulation Model
Areas of Simulation Application

Chapter Topics
Copyright 2010 Pearson Education, Inc.
Publishing as Prentice Hall
14-4
Analogue simulation replaces the original physical
system with an analogous physical system that is easier
to manipulate.
In computer mathematical simulation a system is
replaced with a mathematical model that is analyzed
with the computer.
Simulation offers a means of analyzing very complex
systems that cannot be analyzed using the other
management science techniques.
Examples: weightlessness was simulated using rooms
filled with water; wind tunnels simulated conditions of
flight; treadmills simulated automobile tire wear, etc.
Overview
14-5
A large proportion of the applications of simulations
are for probabilistic models.
We will present simplified simulation models.
The Monte Carlo is a technique for selecting numbers
randomly from a probability distribution for use in a
trial (computer run) of a simulation model.
Monte Carlo is not a type of simulation model, but a
mathematical process used within a simulation.
The basic principle behind the process is the same as
in the operation of gambling devices in casinos (such
as those in Monte Carlo, Monaco).
Monte Carlo Process
14-6
The purpose of the Monte Carlo process is to
generate the random variable, representing the
demand, by sampling from the probability
distribution P(x).
The partitioned roulette wheel replicates the
probability distribution for demand if the values of
demand occur in a random manner.
Let take a first example:
Monte Carlo Process
14-7
Hall
Use Monte Carlo Process
14-8
Table 14.1 Probability Distribution of Demand for Laptop PCs
Example: ComputerWorld demand data for laptops selling for
$4,300 over a period of 100 weeks.
Monte Carlo Process
Use of Random Numbers
14-9
Figure 14.1 A Roulette Wheel for Demand
Monte Carlo Process
14-10
Figure 14.2
Numbered Roulette Wheel
Monte Carlo Process
When the wheel is spun, the actual demand for PCs is
determined by a number at rim of the wheel.
The segment at which
the wheel stops
indicates demand for
one week.
14-11
Table 14.2 Generating Demand from Random Numbers
Monte Carlo Process
Use cumulative probability for ranges
of random numbers.
Demand Cumulative
0 0.20
1 0.60
2 0.80
3 0.90
4 1.00
14-12
Select from a random number table (computer generated):
Table 14.3 Delightfully Random Numbers
Monte Carlo Process
14-13
The selection of random numbers simulates demand
for a period of time.
These random numbers are all equally likely to occur,
just as if we spun a wheel.
Compute demand for each random number, using
the range, and compute revenue.

Monte Carlo Process
14-14
Monte Carlo Process
Table 14.4
Demand Cumulative
0 0.20
1 0.60
2 0.80
3 0.90
4 1.00
14-15
Estimated average demand:

Average demand: 2.07 laptop PCs per week.
Estimated average revenue

Average revenue: $8,886.67.

Monte Carlo Process
07 . 2
15
31
= =
weeks of number
demand total
67 . 886 , 8
15
300 , 133
= =
weeks of number
revenue total
14-16
Average demand could have been calculated analytically:

where = demand value i
= probability of demand
= the number of different demand values
therefore:

Monte Carlo Process
=
=
n
i
i i
x x P x E
1
) ( ) (
week per s PC
x E
' 5 . 1
) 4 )( 10 (. ) 3 )( 10 (. ) 2 )( 20 (. ) 1 )( 40 (. ) 0 )( 20 (. ) (
=
+ + + + =
i
x
) (
i
x P
n
14-17
The more periods simulated, the more accurate the
results.
Simulation results will not equal analytical results
unless enough trials have been conducted to reach
steady state.
Often is difficult to validate results of simulation -
that true steady state has been reached and that
simulation model truly replicates reality.
When analytical analysis is not possible, there is no
analytical standard of comparison thus making
validation even more difficult.
Monte Carlo Process
14-18
As simulation models get more complex they become
impossible to perform manually.
In simulation modeling, random numbers are generated by a
mathematical process instead of a physical process (such as
wheel spinning).
Random numbers are typically generated on the computer
using a numerical technique and thus are not true random
numbers but pseudorandom numbers.

Generating Random Numbers (1 of 2)
14-19
Artificially created random numbers must have the
following characteristics:
1. The random numbers must be uniformly distributed
(each has an equal chance to be selected).
2. The numerical technique for generating the
numbers must be efficient (not degenerating into a
constant; no recycle).
3. The sequence of random numbers should reflect no
pattern.
Generating Random Numbers (2 of 2)
14-20
Exhibit 14.1
Simulation with Excel Spreadsheets
(numbers between 0 and 1, not integers)
14-21
Exhibit 14.2
Simulation with Excel Spreadsheets
14-22
Exhibit 14.3
Simulation with Excel Spreadsheets (100 RN)
14-23
Revised ComputerWorld example; order size of one laptop each week.
Decision Making with Simulation (1 of 2)
Exhibit 14.4
14-24
Order size of two laptops each week.
Decision Making with Simulation (2 of 2)
Exhibit 14.5
14-25
Hall
14-26
Hall
Queuing System
Waiting in queues waiting lines most common
occurrences in everyones life. Quick service is an
important aspect of quality custom service.
Single Server Waiting line system (simplest form of QS)
Queue Discipline (ex. first-come, first-served)
Calling Population (finite or infinite)
Arrival Rate: mean (ex. Poisson distribution)
Service Rate: - mean (ex. Exponential)
Need: < ; Utilization factor: U= / (ie. U < 1)
Solution: adding another employee or adding a new check
out counter.
Multiple Server Waiting line can be in sequence.
Simulation
14-27
Burlingham produces denim. The main step in
production process is dyeing the yarn.

Once batches arrive, it takes some time to complete
the dyeing process.

The following table present the distribution of arrival
intervals and distribution of service time.

Burlingham Mills Example
14-28
Table 14.5 Distribution of Arrival Intervals
Table 14.6 Distribution of Service Times
14-29
Average waiting time = 12.5days/10 batches = 1.25 days per batch
Average time in the system = 24.5 days/10 batches = 2.45 days per
batch
Simulation of Queuing System
Arrival Range r1
1.0 1 - 20
2.0 21 - 60
3.0 61 - 90
4.0 91 99, 00
Service Range r2
0.5 1 20
1.0 21 70
2.0 71 99,00
14-30
Results may be viewed with skepticism.
Ten trials do not ensure steady-state results.
Starting conditions can affect simulation results.
If no batches are in the system at start,
simulation must run until it replicates normal
operating system.
If system starts with items already in the system,
simulation must begin with items in the system.
14-31
Exhibit 14.6
Computer Simulation with Excel
14-32
Hall
Continuous Probability Distribution
Simulation
14-33
Continuous Probability Distributions
4 0 ,
8
) ( s s = x
x
x f
16 2 8
1
8
1
8
) (
2
0
2
0 0
x x
dx x dx
x
x F
x
x x
= |
.
|
\
|
=
}
=
}
=
16
2
x
r =
A continuous function must be used for continuous distributions.
Example:
where x is the time in minutes.
Cumulative probability of x:

Let F(x) be the random number r:

By generation a random number r, a value x for time is
determined.

14-34
Hall
For Continuous Distribution
14-35
Machine Breakdown and Maintenance System
Simulation
Bigelow Manufacturing Company must decide if it should
implement a machine maintenance program at a cost of $20,000
per year that would reduce the frequency of breakdowns and
thus time for repair which is $2,000 per day in lost production.
A continuous probability distribution of the time between
machine breakdowns:

where x = weeks between machine breakdowns.
Since we have
the value of x for a given value of r
i
.
4 0 ,
8
) ( s s = x
x
x f
i
r x 4 =
16
2
x
r =
14-36
Table 14.8
Probability Distribution of Machine Repair Time
Simulation
14-37
Table 14.9
Simulation (3 of 6)

Revised probability of time between machine breakdowns:

weeks where x = weeks between machine breakdowns.

The equation for generating x, given random number r
1
is :

6 0 ,
8
) ( s s = x
x
x f
i
r x 6 =
14-38
Table 14.9
Revised Probability Distribution of Machine Repair
Time with the Maintenance Program

Simulation
14-39

Table 14.10
Simulation - without maintenance program
(total annual repair cost of $84,000):
i
r x 4 =
14-40
Table 14.11
Simulation - with maintenance program
(total annual repair cost of $42,000):
i
r x 6 =
14-41
Simulation
Results and caveats:
Implement maintenance program since cost savings appear
to be $42,000 per year and maintenance program will cost
$20,000 per year.
However, there are potential problems caused by simulating
both systems only once.
Simulation results could exhibit significant variation since
time between breakdowns and repair times are probabilistic.
To be sure of accuracy of results, simulations of each system
must be run many times and average results computed.
Efficient computer simulation required to do this.
14-42
Exhibit 14.7
Simulation with Excel - Original machine breakdown
example:

i
r x 4 =
14-43
Exhibit 14.8
Simulation with Excel - with maintenance program.

i
r x 6 =
14-44
Outcomes of simulation modeling are statistical
measures such as averages.
Statistical results are typically subjected to additional
statistical analysis to determine their degree of
accuracy.
Confidence limits are developed for the analysis of
the statistical validity of simulation results.

Statistical Analysis of Simulation Results (1 of 2)
14-45
Formulas for 95% confidence limits:
upper confidence limit
lower confidence limit
where is the mean and s the standard deviation from a
sample of size n from any population.

We can be 95% confident that the true population mean will be
between the upper confidence limit and lower confidence limit.
) / )( . ( n s x 96 1 + =
) / )( . ( n s x 96 1 =
x
Statistical Analysis of Simulation Results (2 of 2)
14-46
Simulation Results - Statistical Analysis with Excel -
with maintenance program.

Exhibit 14.9
14-47
Simulation Results
Statistical Analysis with Excel (2 of 3)
Exhibit 14.10
14-48
Exhibit 14.11
Simulation Results
Statistical Analysis with Excel (3 of 3)
14-49
CONTINUOUS PROBABILITY DISTRIBUTION
The probability of the random variable assuming a
value within some given interval from x
1
to x
2
is
defined to be the area under the graph of the
probability density function between x
1
and x
2
.

49
f (x)
x
Uniform
x
1
x
2
x
f (x)
Normal
x
1
x
2
x
1
x
2
Exponential
x
f (x)
x
1
x
2
14-50
50
CONTINUED
f (x) = 1/(b a) for a < x < b
= 0 elsewhere
A random variable is uniformly distributed
whenever the probability is proportional to the
intervals length.
The uniform probability density function is:
where: a = smallest value the variable can assume
b = largest value the variable can assume
14-51
Hall
For Continuous Uniform Distribution
14-52
Example:
Slater Buffet customers are charged for the amount of
salad they take. Sampling suggests that the amount of
salad taken is uniformly distributed between 5 ounces
and 15 ounces. What is the probability that a customer
will take between 12 and 15 ounces of salad?
Solution:
Uniform Probability Density Function: f(x) = 1 / (b a )
Let x = salad plate filling weight
f(x) = 1 / ( b a ) = 1 / (15 5 ) = 1 / 10 for 5 x 15

52
14-53
Solution Continued
The probability that a customer will take
between 12 and 15 ounces of salad is 0.3 or 30%.
53
f(x)
x
5
10 15
1/10
Salad Weight (oz.)
P(12 < x < 15) = 1/10(3) = .3
12
14-54
Hall
Solved problem
14-55
Willow Creek Emergency Rescue Squad

Minor emergency requires two-person crew
Regular emergency requires a three-person crew
Major emergency requires a five-person crew
Example Problem Solution (1 of 6)
14-56
Distribution of number of calls per night and emergency type:

Calls Probability
0
1
2
3
4
5
6

.05
.12
.15
.25
.22
.15
.06
1.00

Emergency Type Probability
Minor
Regular
Major

.30
.56
.14
1.00

1. Manually simulate 10 nights of calls
2. Determine average number of calls
each night
3. Determine maximum number of
crew members that might be needed
on any given night.

14-57

Calls Probability
Cumulative
Probability
Random Number
Range, r
1

0
1
2
3
4
5
6

.05
.12
.15
.25
.22
.15
.06
1.00
.05
.17
.32
.57
.79
.94
1.00

1 5
6 17
18 32
33 57
58 79
80 94
95 99, 00

Emergency
Type
Probability
Cumulative
Probability
Random Number
Range, r
1

Minor
Regular
Major

.30
.56
.14
1.00
.30
.86
1.00

1 30
31 86
87 99, 00

Step 1: Develop random number ranges for the probability distributions.
14-58

Step 2: Set Up a Tabular Simulation (use second column of random
numbers in Table 14.3).
14-59
Step 2 continued:
14-60
Step 3: Compute Results:

average number of minor emergency calls per night = 10/10 =1.0
average number of regular emergency calls per night =14/10 = 1.4
average number of major emergency calls per night = 3/10 = 0.30

If calls of all types occurred on same night, maximum number
of squad members required would be 14.
14-61
Crystal Ball
Overview
Many realistic simulation problems contain more
complex probability distributions than those used in the
examples.
However there are several simulation add-ins for Excel
that provide a capability to perform simulation analysis
with a variety of probability distributions in a
spreadsheet format.
Crystal Ball is one of these.
Crystal Ball is a risk analysis and forecasting program
that uses Monte Carlo simulation to provide a statistical
range of results possible .

14-62
Hall
Crystal Ball for Break-even analysis
14-63
Recall from Chapter 1 - Western Clothing Company break-even
and profit analysis:
Price (p) for jeans is $23
variable cost (c
v
) is $8
Fixed cost (c
f
) is $10,000

Profit function: Z = vp - c
f
v
c

break-even volume v = c
f
/(p - c
v
)
= 10,000/(23-8)
= 666.7 pairs.
Crystal Ball
Simulation of Profit Analysis Model (1 of 15)
14-64
Modifications to demonstrate Crystal Ball
Assume volume is now volume demanded and is
defined by a normal probability distribution with mean
of 1,050 and standard deviation of 410 pairs of jeans.
Price is uncertain and defined by a uniform probability
distribution from $20 to $26.
Variable cost is not constant but defined by a triangular
probability distribution.
Will determine average profit and profitability with
given probabilistic variables.

Crystal Ball
14-65

Crystal Ball
14-66

Crystal Ball
Exhibit 14.12
14-67
Crystal Ball
Exhibit 14.13
Click on
Define
Assumtion
14-68
Crystal Ball
Exhibit 14.14
Uniform distribution (mean 1050;
standard deviation 410)
Uniform distribution (min 20; max
26)
Triangular distribution (min 6.75;
most likely 8; max 9.10)
14-69
Crystal Ball
Exhibit 14.15
Uniform distribution (mean 1050;
standard deviation 410)
Uniform distribution (min 20; max
26)
Triangular distribution (min 6.75;
most likely 8; max 9.10)
14-70
Crystal Ball
Exhibit 14.16
Uniform distribution
(mean 1050; standard
deviation 410)
Uniform distribution
(min 20; max 26)
Triangular distribution
(min 6.75; most likely
8; max 9.10)
14-71
Crystal Ball
Exhibit 14.17
14-72
Crystal Ball
Exhibit 14.18
14-73
Crystal Ball
Exhibit 14.19
14-74
Crystal Ball
Exhibit 14.20
14-75
Exhibit 14.21
Crystal Ball
14-76
Crystal Ball
Exhibit 14.22
14-77
Crystal Ball
Exhibit 14.23
14-78
Hall
Verification of the Simulation Model
Simulation
14-79
Analyst wants to be certain that model is internally correct and
that all operations are logical and mathematically correct.
Testing procedures for validity:
Run a small number of trials of the model and compare
with manually derived solutions.
Divide the model into parts and run parts separately to
reduce complexity of checking.
Simplify mathematical relationships (if possible) for
easier testing.
Compare results with actual real-world data.
Verification of the Simulation Model (1 of 2)
14-80
Analyst must determine if model starting conditions
are correct (start with system empty, or as close as
possible to normal conditions).
Must determine how long model should run to insure
steady-state conditions.
A standard, fool proof procedure for validation is not
possible.
Validity of the model rests ultimately on the expertise
and experience of the model developer.

Verification of the Simulation Model (2 of 2)
14-81
Queuing (for complex queuing systems, analytical
formulas are not available)
Inventory Control (mathematical formulas used
assume that demand is certain, but in practice,
demand is usually not certain)
Production and Manufacturing (productions
scheduling, production sequencing, assembly line
balancing, plant layout, plant location, maintenance)

Some Areas of Simulation Application
14-82
Finance (capital budgeting requires estimates of cash
flows which are a result of many random variables; also
for determining market size, selling price, growth rate,
and market share)
Marketing (market size and type, and consumer
preferences; determine possible reaction to introduction
of a product or advertising for an existing product;
analysis of most efficient distribution system)

14-83
Public Service Operations (operation of police
departments, fire departments, post offices, hospitals,
court systems, airports; such operations are so
complex and contain many random variables)
Environmental and Resource Analysis ( impact on the
environment of projects as: nuclear power plants,
reservoirs, highways, and dams (measure of financial
feasibility); other projects: simulate pollution
conditions, energy systems and feasibility of
alternative energy sources)

14-84
Simulation models are typically unstructured and must
be developed for a system or a problem that is also
unstructured (they cannot be applied to a specific type
of problem). As a result, developing a simulation
model requires imagination and intuitiveness.
The validation of simulation models is an area of
serious concern.
Large amounts of staff time, computer time, and
money to develop and run a simulation model.

Limitations of Simulation
14-85
Jet Copies
(Case problem on page 678 in the textbook)
Submit a Word and an Excel file for this assignment.
Use three random variables:
Random variable 1 for computing the time
between breakdowns (one year = 52 weeks)
Random variable 2 for computing the repair time
Random variable 3 for computing the loss revenue.

Assignment 1
14-86
Chapter 4 - Simulation 86

Simulations in Statistics

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Copyright 2010 Pearson Education, Inc. Publishing as Prentice

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