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WA 11.1-11.4(564-579)

# WA 11.1-11.4(564-579) - 11.1 INTRODUCTION model is a...

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11.1 INTRODUCTION Asimulation model is a computer model that imitates a real-life situation. It is like other mathematical models, but it explicitly incorporates uncertainty in one or more input quantities. When we run a simulation, we allow these random quantities to take on various values, and we keep track of any resulting output quantities of interest. In this way, we are able to see how the outputs vary as a function of the varying inputs. The fundamental advantage of a simulation model is that it shows us an entire distribution of results, not simply a single bottom-line result. As an example, suppose an- automobile manufacturer is planning to develop and market anew. model car. The company is ultimately interested in the net present value (NPV) of the profits from this car over the next 10 years. However, there are many uncertainties surrounding this car, including the yearly customer demands for it and the cost of developing it. We could develop a spreadsheet model for the 10-year NPV, using our best guesses for these various uncertain quantities. We could then report the NPV based on these best guesses, with the implicit understanding that this best-guess NPV is going to occur. However, this would provide a very incomplete analysis. It is much better to treat the uncertainty explicitly with a simulation model. This involves entering probability distributions for the uncertain quantities and seeing how the NPV varies as the uncertain quantities vary. Each different set of values for the uncertain quantities can be considered a scenario. Simulation allows us to generate many scenarios, each leading to a particular NPV. In the end, we see a whole distribution of NPVs, not a single best guess. We can see what the NPV will be on average,and we can also see worst-case and best-case results. Simulation models arealso extremely useful for determining how sensitive a system is to changes in operating conditions. For example, we mightsimulate the operations of a supermarket. Once the simulation model has been developed, we can then run it (with suitable modifications) to ask a number of what-if questions. For example, if the supermarket experiences a 20% increase in business, what will happen to the average time customers must wait for service? A great benefit of computer simulation is that it enables us to answer these types of what-if questions without actually changing (or building) a physical system. For example, the supermarket might want to experiment with the number of open registers to see the effect on customer waiting times. The only way it can physically experiment S 64 Chapter 11 Introduction to Simulation Modeling

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with more registers than it currently owns is to purchase moreequipment. Then if it determines that this equipment is not a good investment—customer waiting times do not decrease appreciably—the company is stuck with expensive equipment it doesn’t need. Computer simulation is a much less expensive alternative. It provides the company with an electronic replica of what would
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