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A Case Study: Freddie the Newsboys Problem (Section 16.1) Bidding for a Construction Project (Section 16.2) Project Management: Reliable Construction Co. (Section 16.3) Cash Flow Management: Everglade Golden Years Co. (Section 16.4) Financial Risk Analysis: Think-Big Development Co. (Section 16.5) Revenue Management in the Travel Industry (Section 16.6) Choosing the Right Distribution (Section 16.7) Decision Making with Decision Tables (Section 16.8) Optimizing with OptQuest (Section 16.9) Monte-Carlo Simulation with Crystal Ball (UW Lecture) 16.216.24 16.2516.31 16.3216.43 16.4416.49 16.5016.55 16.5616.61 16.6216.83 16.8416.99 16.10016.118 16.11916.137
These slides are based upon a lecture from the MBA core course in Management Science at the University of Washington (as taught by one of the authors).
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Order Quantity
Simulated Demand Demand (rounded) Sales Revenue Purchasing Cost Salvage Value Prof it
Uniform
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Def ine As sum ptio n Def ine D ecis io n Def ine F oreca st Select As sum ptions Select D ecis io ns Select F oreca s ts Copy D ata Past e D ata Clear D at a Run Pr eferenc es
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Start S im ulatio n Stop S imulat io n Res et S imulat io n Single St ep Foec as t W indo ws Overlay C hart Trend C hart Sensit iv it y Cha rt Creat e R eport Ext ract D ata Cry st al Ball He lp
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The static option means that each cell reference is only evaluated once, at the beginning of the simulation run, and then each parameter value (e.g., Min and Max) is used for all trials of the simulation.
The dynamic option means that each cell reference is evaluated for each separate trial. This would be needed if the parameter value might change from trial to trial because it depends on another assumption cell.
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The mean standard error can be reduced by increasing the number of trials. However, cutting the mean standard error in half typically requires approximately our times as many trials.
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750 trials were required to get the 95% confidence interval around the mean within $1.
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This table shows the precision obtained for the various percentiles of profit after 750 trials.
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Competitor Distribution Parameters (Proportion of Our Project Cost) Minimum 95% 110% Most Likely 130% 125% Maximum 160% 140% Competitor Distribution Parameters ($millions) Minimum 4.323 Most Likely 5.915 Maximum 7.280 Minimum Competitor Bid ($million) Our Bid ($million) Win Bid? Profit ($million)
120% 130%
5.460 5.915
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Question: What is the probability that the project will complete by the deadline?
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FINISH 0
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Triangular distribution
m Elapsed time
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Activity A B C D E F G H I J K L M N
p 3 8 18 10 5 10 11 17 9 9 4 7 3 9
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Question: How large of a long-term loan should Everglade take out now?
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Year
2003
2004 2005 2006
8
2 4 3
2007
2008 2009 2010 2011 2012
6
3 4 7 2 10
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Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
LT Interest -0.465 -0.465 -0.465 -0.465 -0.465 -0.465 -0.465 -0.465 -0.465 -0.465
ST Interest -0.085 -0.340 -0.821 -0.649 -0.161 0.000 -0.370 0.000 0.000 0.000
LT Payback
ST Payback -0.851 -3.401 -8.207 -6.493 -1.607 0.000 -3.699 0.000 0.000 0.000
-6.649
Ending Balance 0.500 0.500 0.500 0.500 0.500 1.266 0.500 2.965 0.500 10.035 2.920
>= >= >= >= >= >= >= >= >= >= >=
Minimum Balance 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5
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A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
LT Loan 6.65
LT Interest -0.47 -0.47 -0.47 -0.47 -0.47 -0.47 -0.47 -0.47 -0.47 -0.47
LT Payback
-6.65
Balance Before ST Loan -0.35 -2.57 -7.01 -4.89 0.11 2.60 -1.86 5.10 3.64 14.17 7.05
ST Loan 0.85 3.07 7.51 5.39 0.39 0.00 2.36 0.00 0.00 0.00
Ending Balance 0.50 0.50 0.50 0.50 0.50 2.60 0.50 5.10 3.64 14.17 7.05
>= >= >= >= >= >= >= >= >= >= >=
Minimum Balance 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50
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0
1 2 3 4 5 6 7
80
Normal (80, 5) Normal (80, 10) Normal (70, 15) Normal (+30, 20) Normal (+40, 20) Normal (+50, 20) Uniform (200, 844)
0
1 2 3 4 5 6 7
90
Normal (50, 5) Normal (20, 5) Normal (60, 10) Normal (+15, 15) Normal (+25, 15) Normal (+40, 15) Uniform (160, 600)
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5 10 15 20 20 20 844
(mean, st. dev.) (mean, st. dev.) (mean, st. dev.) (mean, st. dev.) (mean, st. dev.) (mean, st. dev.) (min, max)
-90 -50 -20 -60 15 25 40 387.5 Think Big's Sim ulate d Cash Flow ($m illions) -24.999 -19.755 -15.822 -19.416 6.917 9.878 13.494 136.931 18.120
5 5 10 15 15 15 615
(mean, st. dev.) (mean, st. dev.) (mean, st. dev.) (mean, st. dev.) (mean, st. dev.) (mean, st. dev.) (min, max)
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Question: How many reservations should Transcontinental accept for this flight?
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Normal
152
Binomial
150 2
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Some value most likely (the mean) Values close to mean more likely Symmetric (as likely above as below mean) Extreme values possible, but rare
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Some value most likely Values close to most likely value more common Can be asymmetric Fixed upper and lower bound
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Some value most likely Positively skewed (below mean more likely) Values cannot fall below zero Extreme values (high end only) possible, but rare
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Random value above some number (location) Shape > 0 (usually 10) Shape < 3 becomes more positively-skewed (below mean more likely) until it resembles exponential distribution (equivalent at Shape = 1) Symmetrical at Shape = 3.25, becomes negatively skewed above that Scale defines width
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Random value between 0 and some positive number (Scale) Shape specified using two positive values (alpha, beta) Alpha < beta: positively skewed (below mean more likely) Beta < alpha: negatively skewed
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Widely used to describe time between random events (e.g., time between arrivals) Events are independent Rate = average number of events per unit time (e.g., arrivals per hour)
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Describes the number of times an event occurs during a given period of time or space Occurrences are independent Any number of events is possible Rate = average number of events per unit of time, assumed constant over time
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Describes number of times an event occurs in a fixed number of trials (e.g., number of heads in 10 flips of a coin) For each trial, only two outcomes are possible Trials independent Probability remains the same for each trial
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Describes number of trials until an event occurs (e.g., number of times to spin roulette wheel until you win) Probability same for each trial Continue until succeed Number of trials unlimited
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Describes number of trials until an event occurs n times Same as geometric when Shape = n = 1 Probability same for each trial Continue until nth success Number of trials unlimited
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Enter set of values with varying probabilities For each discrete value, enter Value and Prob. (leave other boxes blank) Clicking Enter clears boxes for entering next discrete value
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Enter range of discrete values, each equally likely Enter lower and upper end of range in Value and Value2 Enter the total probability for the whole set in Prob. Enter the distance between discrete values in Step
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Enter the lower and upper end of range in Value and Value2 Enter the total probability for the range in Prob. Leave Step blank for a continuous distribution Drag the corners of the distribution graph up or down to change relative probabilities Dragging corners may affect total probability. Click on Rescale to reset total probability.
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Any combination of discrete values, ranges of discrete values, or continuous distributions can be entered Input each element, click on Enter, input next element, etc. If cumulative probabilities do not add to 1, click on Rescale
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11. If desired, the Next Distribution button can be clicked repeatedly for identifying the other types of distributions that are next in line for fitting the data well.
12. After choosing the distribution that you want to use, click the Accept button while that distribution is showing. This will enter the appropriate parameters into the dialogue box for this distribution. Clicking OK then enters this distribution into the assumption cell.
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Crystal Ball can be used to evaluate a particular value of the decision variable by providing a wealth of output for the forecast cells. However, this approach does not identify an optimal solution for the decision variable(s).
Trial and error can be used to try different values of the decision variable(s).
Run a simulation for each, and see which one provides the best estimate of the chosen measure of performance.
The Decision Table tool in Crystal Ball does this approach in a systematic way.
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3. Click on the Define Decision button in the Crystal Ball toolbar, which brings up the Define Decision Variable dialogue box.
4. Enter the lower and upper limit of the range of values to be simulated for the decision variable. 5. Click on either Continuous or Discrete to define the type of variable. 6. If Discrete is selected in Step 5, use the Step box to specify the difference between the successive possible values (not just those to be simulated). 7. Click on OK.
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The search is conducted by executing a series of simulation runs of leading candidates to be the actual optimal solution.
The results of each run are used to determine the most promising remaining candidate to try next. A powerful search engine (based on genetic algorithms) conducts an intelligent and efficient search.
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9. Choose Copy to Excel from the Edit menu to copy your results to your spreadsheet model.
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Revenue ($millions) if Successful Project Up Stable Choice Hope R&D Investment ($millions) $400 300 600 500 Success Rate 50% 35 35 20 Mean $1,400 1,200 2,200 3,000 Standard Deviation $400 400 600 900
Release
200
45
600
200
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A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Revenue ($millions) (if Successful) 1,400 1,200 2,200 3,000 600 Total profit ($millions)
Decisions 0 0 0 0 0
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OptQuest for Tazers Project Selection: Selecting Variables and Specifying Constraints
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5. Run Simulation
Run the simulation. If you would like to change parameters and re-run the simulation, you should reset the simulation (click on the Reset Simulation button on the toolbar or in the Run menu) first.
6. View Results
The forecast window showing the results of the simulation appears automatically after (or during) the simulation. Many different results are available (frequency chart, cumulative chart, statistics, percentiles, sensitivity analysis, and trend chart). The results can be copied into the worksheet.
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Def ine As sum ptio n Def ine D ecis io n Def ine F oreca st Select As sum ptions Select D ecis io ns Select F oreca s ts Copy D ata Past e D ata Clear D at a Run Pr eferenc es Start S im ulatio n Stop S imulat io n Res et S imulat io n Single St ep Foec as t W indo ws Overlay C hart Trend C hart Sensit iv it y Cha rt Creat e R eport Ext ract D ata Cry st al Ball He lp
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Order Quantity
Simulated Demand Demand (rounded) Sales Revenue Purchasing Cost Salvage Value Prof it
Uniform
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Fitting a Distribution
Crystal Ball can be used to fit a distribution to data. The following data has been collected for the previous 100 phone calls to a mail-order house:
A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 99 100 101 102 103 104 B C D E F G H I
Phone Data
Customer # 1 2 3 4 5 6 7 8 9 10 95 96 97 98 99 100 Arrival (minutes) 8.22 12.25 12.27 16.26 18.06 18.87 23.46 23.53 28.73 30.56 194.02 195.48 195.87 196.84 197.81 200.43 Interarrival Time 8.22 4.03 0.02 3.98 1.81 0.81 4.58 0.08 5.20 1.83 0.28 1.46 0.38 0.98 0.97 2.61 Length of Call (minutes) 3.77 4.53 4.04 3.70 5.38 4.36 4.41 5.14 4.76 4.68 4.26 3.37 4.45 5.06 5.20 4.25 Interarrival Time 2.004 Length of Call (minutes) 4.51
Averages
Simulation
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3. Click the Fit button, then select the source of the fitted data.
4. Click the Next button, then select the distributions to try to fit. 5. Click OK.
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