13

Simulation
Modeling

To accompany
Quantitative Analysis for Management, Twelfth Edition,
by Render, Stair, Hanna and Hale
Power Point slides created by Jeff Heyl Copyright ©2015 Pearson Education, Inc.
 Introduction
• Simulation is one of the most widely used
quantitative analysis tools
• To simulate is to try to duplicate the features,
appearance, and characteristics of a real
system
– Build a mathematical model that comes as close
as possible to representing the reality of the
system
– Physical models can also be built to test systems
– Problems can range from simple to extremely
complex

Copyright ©2015 Pearson Education, Inc. 13 – 2

 Introduction
• Using simulation, a manager should
1. Define a problem
2. Introduce the variables associated with the
problem
3. Construct a simulation model
4. Set up possible courses of action for testing
5. Run the simulation experiment
6. Consider the results
7. Decide what courses of action to take

Copyright ©2015 Pearson Education, Inc. 13 – 3

Process of Define Problem

Simulation Introduce Important

Variables

FIGURE 13.1 – Construct Simulation

Process of Simulation Model

Specify Values of
Variables to Be Tested

Conduct the
Simulation

Examine the
Results

Select Best Course

of Action
Copyright ©2015 Pearson Education, Inc. 13 – 4
 Advantages and Disadvantages
of Simulation
• Advantages
1. Relatively straightforward and flexible
2. Recent advances in computer software make
simulation models very easy to develop
3. Can be used to analyze large and complex real-
world situations
4. Allows “what-if?” type questions
5. Does not interfere with the real-world system
6. Enables study of interactions between
components
7. Enables time compression
8. Enables the inclusion of real-world complications
Copyright ©2015 Pearson Education, Inc. 13 – 5
 Advantages and Disadvantages
of Simulation
• Disadvantages
1. Often expensive, may require a long complicated
process to develop the model
2. Does not generate optimal solutions; it is a trial-
and-error approach
3. Requires managers to generate all conditions and
constraints of real-world problem
4. Each model is unique and the solutions and
inferences are not usually transferable to other
problems

Copyright ©2015 Pearson Education, Inc. 13 – 6

 Monte Carlo Simulation
• When systems contain elements that exhibit chance
in their behavior, the Monte Carlo method of
simulation can be applied
• The basis of the Monte Carlo simulation is
experimentation on the probabilistic elements through
random sampling
– Some examples are
1. Inventory demand
2. Lead time for inventory
3. Times between machine breakdowns
4. Times between arrivals
5. Service times
6. Times to complete project activities
7. Number of employees absent

Copyright ©2015 Pearson Education, Inc. 13 – 7

 Monte Carlo Simulation
• Based on these five steps
1. Establishing a probability distribution for important
input variables
2. Building a cumulative probability distribution for
each variable in Step 1
3. Establishing an interval of random numbers for
each variable
4. Generating random numbers
5. Simulating a series of trials

Copyright ©2015 Pearson Education, Inc. 13 – 8

 Harry’s Auto Tire
• A popular radial tire accounts for a large
portion of the sales
– Determine a policy for managing this inventory
– Simulate the daily demand for a number of days

Step 1: Establishing probability distributions

– One way to establish a probability distribution
for a given variable is to examine historical
outcomes
– Managerial estimates based on judgment and
experience can also be used

Copyright ©2015 Pearson Education, Inc. 13 – 9

 Harry’s Auto Tire
TABLE 13.1 – Historical Daily Demand for Radial Tires at Harry’s Auto Tire and
Probability Distribution

FREQUENCY PROBABILITY OF
DEMAND FOR TIRES
(DAYS) OCCURRENCE
0 10 10/200 = 0.05
1 20 20/200 = 0.10
2 40 40/200 = 0.20
3 60 60/200 = 0.30
4 40 40/200 = 0.20
5 30 30/200 = 0.15
200 200/200 = 1.00

Copyright ©2015 Pearson Education, Inc. 13 – 10

 Harry’s Auto Tire
• Step 2: Building a cumulative probability
distribution for each variable
– Converting from a regular probability to a
cumulative distribution is an easy job
– A cumulative probability is the probability that a
variable will be less than or equal to a particular
value
– A cumulative distribution lists all of the possible
values and the probabilities

Copyright ©2015 Pearson Education, Inc. 13 – 11

 Harry’s Auto Tire
TABLE 13.2 – Cumulative Probabilities for Radial Tires

DAILY DEMAND PROBABILITY CUMULATIVE PROBABILITY

0 0.05 0.05
1 0.10 0.15
2 0.20 0.35
3 0.30 0.65
4 0.20 0.85
5 0.15 1.00

Copyright ©2015 Pearson Education, Inc. 13 – 12

 Harry’s Auto Tire
• Step 3: Setting random number intervals
– Assign a set of numbers to represent each
possible value or outcome
– These are random number intervals
– A random number is a series of digits that have
been selected by a totally random process
– The range of the random number intervals
corresponds exactly to the probability of the
outcomes
– A cumulative probability graph can help assign
random numbers

Copyright ©2015 Pearson Education, Inc. 13 – 13

 Harry’s Auto Tire
FIGURE 13.2 –
Graphical
1.00
Representation of – 00
1.00 –
the Cumulative
Probability 0.85
– 86
Distribution for 85
0.80 – Represents 4
Radial Tires
Tires Demanded
Cumulative Probability
0.65
– 66
65
0.60 –

Numbers
Random
0.40 – 0.35
– 36
35

0.15
0.20 – – 16
15 Represents 1
0.05 06 Tire Demanded
–
– 05
– 01
0.00 –
0 1 2 3 4 5
Daily Demand for Radials

Copyright ©2015 Pearson Education, Inc. 13 – 14

 Harry’s Auto Tire
TABLE 13.3 – Assignment of Random Number Intervals for Harry’s Auto Tire

CUMULATIVE INTERVAL OF
DAILY DEMAND PROBABILITY PROBABILITY RANDOM NUMBERS
0 0.05 0.05 01 to 05
1 0.10 0.15 06 to 15
2 0.20 0.35 16 to 35
3 0.30 0.65 36 to 65
4 0.20 0.85 66 to 85
5 0.15 1.00 86 to 00

Copyright ©2015 Pearson Education, Inc. 13 – 15

 Harry’s Auto Tire
• Step 4: Generating random numbers
– Random numbers can be generated in several
ways
– Large problems will use computer program to
generate the needed random numbers
– For small problems, random processes like roulette
wheels or pulling chips from a hat may be used
– The most common manual method is to use a
random number table
– Everything is random in a random number table so
numbers can be selected from anywhere in the
table

Copyright ©2015 Pearson Education, Inc. 13 – 16

 Harry’s Auto Tire
TABLE 13.4 – Table of Random Numbers (partial)

52 06 50 88 53 30 10 47 99 37
37 63 28 02 74 35 24 03 29 60
82 57 68 28 05 94 03 11 27 79
69 02 36 49 71 99 32 10 75 21
98 94 90 36 06 78 23 67 89 85
96 52 62 87 49 56 59 23 78 71
33 69 27 21 11 60 95 89 68 48
50 33 50 95 13 44 34 62 64 39
88 32 18 50 62 57 34 56 62 31
90 30 36 24 69 82 51 74 30 35

Copyright ©2015 Pearson Education, Inc. 13 – 17

 Harry’s Auto Tire
• Step 5: Simulating the experiment
– Select random numbers from Table 13.4
– The number we select will have a corresponding
range in Table 13.3
– Use the daily demand that corresponds to the
probability range aligned with the random number

Copyright ©2015 Pearson Education, Inc. 13 – 18

 Harry’s Auto Tire
TABLE 13.5 – Ten-Day Simulation of Demand for Radial Tires

DAY RANDOM NUMBER SIMULATED DAILY DEMAND

1 52 3
2 37 3
3 82 4
4 69 4
5 98 5
6 96 5
7 33 2
8 50 3
9 88 5
10 90 5
39 = total 10-day demand
3.9 = average daily demand for tires

Copyright ©2015 Pearson Education, Inc. 13 – 19

 Harry’s Auto Tire
• Note that the average demand from this simulation
(3.9 tires) is different from the expected daily demand

Expected
daily
demand
 (0.05)(0) + (0.10)(1) + (0.20)(2) + (0.30)(3)
+ (0.20)(4) + (0.15)(5)
 2.95 tires

Copyright ©2015 Pearson Education, Inc. 13 – 20

 Harry’s Auto Tire
• Note that the average demand from this simulation
(3.9 tires) is different from the expected daily demand

If this simulation were repeated hundreds or

Expected
daily
thousands of times it is much more likely the
demand
average simulated demand would be nearly the
sameas the expected
(0.05)(0) demand
+ (0.10)(1) + (0.20)(2) + (0.30)(3)
+ (0.20)(4) + (0.15)(5)
 2.95 tires

Copyright ©2015 Pearson Education, Inc. 13 – 21

 Simulation and
Inventory Analysis

• Previously introduced deterministic inventory models

• In many real-world inventory situations demand and
lead time are variables
• Accurate analysis is difficult without simulation
• An inventory problem with two decision variables and
two probabilistic components
• The owner of a hardware store wants to establish
– Order quantity and reorder point decisions
– Product that has probabilistic daily demand and reorder lead
time

Copyright ©2015 Pearson Education, Inc. 13 – 22

 Simkin’s Hardware Store
• Find a good, low cost inventory policy
for the Ace electric drill
• Simkin identifies two types of variables
– Controllable inputs
• Order quantity
• Reorder points
– Uncontrollable inputs
• Daily demand
• Variable lead time

Copyright ©2015 Pearson Education, Inc. 13 – 23

 Simkin’s Hardware Store
TABLE 13.6 – Probabilities and Random Number Intervals for Daily Ace Drill Demand

(1) (2) (4) (5)

DEMAND FOR FREQUENCY (3) CUMULATIVE INTERVAL OF
ACE DRILL (DAYS) PROBABILITY PROBABILITY RANDOM NUMBERS
0 15 0.05 0.05 01 to 05
1 30 0.10 0.15 06 to 15
2 60 0.20 0.35 16 to 35
3 120 0.40 0.75 36 to 75
4 45 0.15 0.90 76 to 90
5 30 0.10 1.00 91 to 00
300 1.00

Copyright ©2015 Pearson Education, Inc. 13 – 24

 Simkin’s Hardware Store
TABLE 13.7 – Probabilities and Random Number Intervals for Reorder Lead Time

(1) (2) (4) (5)

LEAD TIME FREQUENCY (3) CUMULATIVE RANDOM NUMBER
(DAYS) (ORDERS) PROBABILITY PROBABILITY INTERVAL
1 10 0.20 0.20 01 to 20
2 25 0.50 0.70 21 to 70
3 15 0.30 1.00 71 to 00
50 1.00

Copyright ©2015 Pearson Education, Inc. 13 – 25

 Simkin’s Hardware Store
• The third step is to develop a simulation
model
– A flow diagram, or flowchart, is helpful in this
process
• The fourth step in the process is to specify the
values of the variables to be tested
– The first policy is an order quantity of 10 with a
reorder point of 5
• The fifth step is to actually conduct the
simulation
– The process is simulated for a 10 day period

Copyright ©2015 Pearson Education, Inc. 13 – 26

 Start

Simkin’s Begin day

of simulation

Hardware Has
order
arrived?
Yes Increase beginning
inventory by
quantity ordered

Store No
Select random number
to generate today’s
demand

FIGURE 13.3 – Is
Yes Record
Flow Diagram for demand greater
number of
than beginning
Simkin’s Inventory inventory lost sales
Example ?
No
Compute ending inventory Record ending
= Beginning inventory inventory = 0
– Demand

Is Has
ending inventory Yes order been No Place
less than reorder placed that hasn’t order
point? arrived yet
?
No Have Yes Select random
No enough days number to
of this order policy generate lead
been simulated time
?
Yes
Compute average ending inventory,
average lost sales, average number of End
Copyright ©2015 Pearson Education, Inc. orders placed, and corresponding costs 13 – 27
 Simkin’s Hardware Store
• Using the table of random numbers, the
simulation is conducted using a four-step
process
1. Begin each day by checking whether an ordered
inventory has arrived (column 2). If it has,
increase the current inventory (in column 3) by
the quantity ordered.
2. Generate a daily demand from the demand
probability distribution by selecting a random
number. This random number is recorded in
column 4. The demand simulated is recorded in
column 5.

Copyright ©2015 Pearson Education, Inc. 13 – 28

 Simkin’s Hardware Store
3. Compute the ending inventory every day and
record it in column 6. Ending inventory equals
beginning inventory minus demand. If on-hand
inventory is insufficient to meet the day’s
demand, satisfy as much as possible and note
the number of lost sales (in column 7).
4. Determine whether the day’s ending inventory
has reached the reorder point (5 units). If it has
and if there are no outstanding orders, place an
order (column 8). Lead time for a new order is
simulated by first choosing a random number
from Table 13.4 and recording it in column 9.
Finally, we convert this random number into a
lead time by using the distribution in Table 13.7.

Copyright ©2015 Pearson Education, Inc. 13 – 29

 Simkin’s Hardware Store
TABLE 13.8 – Simkin Hardware’s First Inventory Simulation

ORDER QUANTITY = 10 UNITS REORDER POINT = 5 UNITS

(2) (3) (4) (6) (7) (9) (10)

(1) UNITS BEGINNING RANDOM (5) ENDING LOST (8) RANDOM LEAD
DAY RECEIVED INVENTORY NUMBER DEMAND INVENTORY SALES ORDER NUMBER TIME
1 … 10 06 1 9 0 No
2 0 9 63 3 6 0 No
3 0 6 57 3 3 0 Yes 02 1
4 0 3 94 5 0 2 No
5 10 10 52 3 7 0 No
6 0 7 69 3 4 0 Yes 33 2
7 0 4 32 2 2 0 No
8 0 2 30 2 0 0 No
9 10 10 48 3 7 0 No
10 0 7 88 4 3 0 Yes 14 1
Total 41 2

Copyright ©2015 Pearson Education, Inc. 13 – 30

 Analyzing Simkin’s
Inventory Cost
• The objective is to find a low-cost solution so Simkin
must determine the costs
• Equations for average daily ending inventory, average
lost sales, and average number of orders placed
Average
ending
inventory

Average
lost sales

Average
number of
orders placed
Copyright ©2015 Pearson Education, Inc. 13 – 31
 Analyzing Simkin’s
Inventory Cost
• Simkin’s store is open 200 days a year
• Estimated ordering cost is $10 per order
• Holding cost is $6 per drill per year
• Lost sales cost $8

Daily order cost = (Cost of placing one

order)
x (Number of orders placed per day)
= $10 per order x 0.3 order per day =
$3
Daily holding cost = (Cost of holding
one unit for one day) x (Average ending
inventory)
Copyright ©2015 Pearson Education, Inc. = $0.03 per unit per day x 4.1 units 13 – 32
 Analyzing Simkin’s
Inventory Cost
• Simkin’s store is open 200 days a year
• Estimated ordering cost is $10 per order
• Holding cost is $6 per drill per year
• Lost sales cost $8

Daily stockout cost = (Cost per lost

sale)
x (Average number of lost sales per day)
= $8 per lost sale x 0.2 lost sales per
day
= $1.60
Total daily
inventory cost = Daily order cost +
Copyright ©2015 Pearson Education, Inc. Daily holding cost 13 – 33
 Analyzing Simkin’s
Inventory Cost
• For the year, this policy would cost approximately
$944
• Simulation should really be extended for many more
days
• Even after a larger simulation, the model must be
verified and validated to make sure it truly represents
the situation on which it is based
• If we are satisfied with the model, additional
simulations can be conducted using other values for
the variables
• After simulating all reasonable combinations, Simkin
would select the policy that results in the lowest total
cost
Copyright ©2015 Pearson Education, Inc. 13 – 34
 Simulation of a Queuing Problem

• Modeling waiting lines is an important

application of simulation
– The assumptions of queuing models are
quite restrictive
– Sometimes simulation is the only approach
available
– This section illustrates a situation where
arrivals do not follow a Poisson distribution
and unloading rates are not exponential or
constant

Copyright ©2015 Pearson Education, Inc. 13 – 35

 Port of New Orleans
• Fully loaded barges arrive at night for unloading
• The number of barges each night varies from 0 – 5,
and the number of barges vary from day to day
• The supervisor has information which can be used to
create a probability distribution for the daily unloading
rate
• Barges are unloaded first-in, first-out
• Barges must wait for unloading which is expensive
• The dock superintendent wants to do a simulation
study to enable him to make better staffing decisions

Copyright ©2015 Pearson Education, Inc. 13 – 36

 Port of New Orleans
TABLE 13.9 – Overnight Barge Arrival Rates and Random Number Intervals

NUMBER OF CUMULATIVE RANDOM

ARRIVALS PROBABILITY PROBABILITY NUMBER INTERVAL
0 0.13 0.13 01 to 13
1 0.17 0.30 14 to 30
2 0.15 0.45 31 to 45
3 0.25 0.70 46 to 70
4 0.20 0.90 71 to 90
5 0.10 1.00 91 to 00

Copyright ©2015 Pearson Education, Inc. 13 – 37

 Port of New Orleans
TABLE 13.10 – Unloading Rates and Random Number Intervals

DAILY UNLOADING CUMULATIVE RANDOM

RATE PROBABILITY PROBABILITY NUMBER INTERVAL
1 0.05 0.05 01 to 05
2 0.15 0.20 06 to 20
3 0.50 0.70 21 to 70
4 0.20 0.90 71 to 90
5 0.10 1.00 91 to 00
1.00

Copyright ©2015 Pearson Education, Inc. 13 – 38

 Port of New Orleans
TABLE 13.11 – Queuing Simulation of Port of New Orleans Barge Unloadings

(2) (3) (4) (5) (6) (7)

(1) NUMBER DELAYED RANDOM NUMBER OF TOTAL TO BE RANDOM NUMBER
DAY FROM PREVIOUS DAY NUMBER NIGHTLY ARRIVALS UNLOADED NUMBER UNLOADED
1 — 52 3 3 37 3
2 0 06 0 0 63 0
3 0 50 3 3 28 3
4 0 88 4 4 02 1
5 3 53 3 6 74 4
6 2 30 1 3 35 3
7 0 10 0 0 24 0
8 0 47 3 3 03 1
9 2 99 5 7 29 3
10 4 37 2 6 60 3
11 3 66 3 6 74 4
12 2 91 5 7 85 4
13 3 35 2 5 90 4
14 1 32 2 3 73 3
15 0 00 5 5 59 3
20 41 39
Total delays Total arrivals Total unloadings

Copyright ©2015 Pearson Education, Inc. 13 – 39

 Port of New Orleans
• Three important pieces of information

Average number of barges

delayed to the next day

Average number of
nightly arrivals

Average number of barges

unloaded each day

Copyright ©2015 Pearson Education, Inc. 13 – 40

 Simulation Model for a
Maintenance Policy

• Simulation can be used to analyze

different maintenance policies before
actually implementing them
• Many options regarding staffing levels,
parts replacement schedules, downtime,
and labor costs can be compared
• This can include completely shutting
down factories for maintenance

Copyright ©2015 Pearson Education, Inc. 13 – 41

 Three Hills Power Company
• Three Hills provides power to a large city through a
series of almost 200 electric generators
• The company is concerned about generator failures
because a breakdown costs about $75 per generator
per hour
• Their four repair people earn $30 per hour and work
rotating 8 hour shifts
• Management wants to evaluate the
1. Service maintenance cost
2. Simulated machine breakdown cost
3. Total cost

Copyright ©2015 Pearson Education, Inc. 13 – 42

 Three Hills Power Company
• There are two important maintenance system
components
– Time between successive generator breakdowns which
varies from 30 minutes to three hours
– The time it takes to repair the generators which ranges from
one to three hours in one hour blocks
• A next event simulation is constructed to study this
problem

Copyright ©2015 Pearson Education, Inc. 13 – 43

Three Hills
Start

Generate random number for “Time

Between Breakdowns”

Flow Record actual clock time of breakdown

Diagram Examine time previous repair ends

Is
repairperson free No Wait until previous
to begin repair? repair is completed
FIGURE 13.4 –
Three Hills Flow Yes
Diagram
Generate random number for repair
time required

Compute time repair completed

Compute hours of machine downtime

= Time repair completed – Clock time
of breakdown

No Enough
breakdowns
simulated?

Yes
Compute downtime and comparative End
costs data

Copyright ©2015 Pearson Education, Inc. 13 – 44

 Three Hills Power Company
TABLE 13.12 – Time Between Generator Breakdown at Three Hills Power

TIME BETWEEN
RECORDED NUMBER RANDOM
MACHINE OF TIMES CUMULATIVE NUMBER
FAILURES (HRS) OBSERVED PROBABILITY PROBABILITY INTERVAL
0.5 5 0.05 0.05 01 to 05
1.0 6 0.06 0.11 06 to 11
1.5 16 0.16 0.27 12 to 27
2.0 33 0.33 0.60 28 to 60
2.5 21 0.21 0.81 61 to 81
3.0 19 0.19 1.00 82 to 00
Total 100 1.00

Copyright ©2015 Pearson Education, Inc. 13 – 45

 Three Hills Power Company
TABLE 13.13 – Generator Repair Times Required

NUMBER RANDOM
REPAIR TIME OF TIMES CUMULATIVE NUMBER
REQUIRED (HRS) OBSERVED PROBABILITY PROBABILITY INTERVAL
1 28 0.28 0.28 01 to 28
2 52 0.52 0.80 29 to 80
3 20 0.20 1.00 81 to 00
Total 100 1.00

Copyright ©2015 Pearson Education, Inc. 13 – 46

 Three Hills Power Company
TABLE 13.14 – Simulation of Generator Breakdowns and Repairs

(5) (6) (9)

TIME REPAIR- RANDOM NUMBER
(2) (3) PERSON IS NUMBER (7) (8) OF
(1) RANDOM TIME (4) FREE TO FOR REPAIR TIME HOURS
BREAKDOWN NUMBER FOR BETWEEN TIME OF BEGIN THIS REPAIR TIME REPAIR MACHINE
NUMBER BREAKDOWNS BREAKDOWNS BREAKDOWN REPAIR TIME REQUIRED ENDS DOWN
1 57 2 02:00 02:00 07 1 03:00 1
2 17 1.5 03:30 03:30 60 2 05:30 2
3 36 2 05:30 05:30 77 2 07:30 2
4 72 2.5 08:00 08:00 49 2 10:00 2
5 85 3 11:00 11:00 76 2 13:00 2
6 31 2 13:00 13:00 95 3 16:00 3
7 44 2 15:00 16:00 51 2 18:00 3
8 30 2 17:00 18:00 16 1 19:00 2
9 26 1.5 18:30 19:00 14 1 20:00
1.5
10 09 1 19:30 20:00 85 3 23:00
3.5
11 49 2 21:30 23:00 59 2 01:00
3.5
12 13 1.5 23:00 01:00 85 3 04:00 5
13 33 2 01:00 04:00 40 2 06:00 5
14 89 3 04:00 06:00 42 2 08:00 4
15 13 1.5 05:30 08:00 52 2 10:00
4.5
Copyright ©2015 Pearson Education, Inc. 13 – 47
Total 44
 Cost Analysis of the Simulation
• The simulation of 15 generator breakdowns covers 34
hours of operation
• Analysis of the simulation
Service
= 34 hours of worker service time
maintenance cost
x $30 per hour
= $1,020
Simulated machine = 44 total hours of breakdown
breakdown cost x $75 lost per hour of downtime
= $3,300
Total simulated
maintenance cost of = Service cost + Breakdown cost
the current system = $1,020 + $3,300
= $4,320
Copyright ©2015 Pearson Education, Inc. 13 – 48
 Cost Analysis of the Simulation
• The cost of $4,320 should be compared with
other more or less attractive maintenance
options
• The company might explore options like
adding another repairperson
• Strategies such as preventive maintenance
might also be simulated for comparison

Copyright ©2015 Pearson Education, Inc. 13 – 49

 Other Simulation Issues
• Simulation models are widely used in
business
– Not restricted by assumptions of other models
• Two other types of simulation models
– Operational gaming
– Systems simulation
• Theoretically different but computerized
simulation has tended to blur the differences

Copyright ©2015 Pearson Education, Inc. 13 – 50

 Operational Gaming
• Operational gaming refers to
simulation involving two or more
competing players
– Best examples are military games and
business games
– Allow the testing of management and
decision-making skills in hypothetical
situations of conflict

Copyright ©2015 Pearson Education, Inc. 13 – 51

 Systems Simulation
• Systems simulation similar to business
gaming
– Allows users to test various managerial policies
and decisions to evaluate their effect on the
operating environment
• Models the dynamics of large systems
– Corporate operating system
– Urban government
– Economic systems
• Allows what-if? questions to test the effects of
various policies
Copyright ©2015 Pearson Education, Inc. 13 – 52
 Systems Simulation
FIGURE 13.5 – Inputs and Outputs of a Typical Economic System Simulation

Inputs Model Outputs

Income Tax Gross National
Levels Product
Corporate Tax Inflation Rates
Rates Econometric Model Unemployment
Interest Rates (in Series of Rates
Mathematical Monetary
Government
Equations) Supplies
Spending
Foreign Trade Population
Policy Growth Rates

Copyright ©2015 Pearson Education, Inc. 13 – 53

 Verification and Validation
• It is important that a simulation model be checked to
see that it is working properly and providing good
representation of the real world situation
• Verification involves determining that the computer
model is internally consistent and following the logic
of the conceptual model
– Answers the question “Did we build the model right?”
• Validation compares a simulation model to the real
system it represents to make sure it is accurate
– Answers the question “Did we build the right model?”

Copyright ©2015 Pearson Education, Inc. 13 – 54

 Role of Computers in Simulation
• Computers are critical in simulating complex tasks
• General-purpose programming languages can be used
• Simulation software tools have been developed to make
the process easier
– Arena – ExtendSim
– ProModel – Proof 5
– SIMUL8
• Excel and add-ins can also be used
– @Risk – RiskSim
– Crystal Ball – XLSim

Copyright ©2015 Pearson Education, Inc. 13 – 55

 Copyright

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reproduced, stored in a retrieval system, or transmitted, in
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photocopying, recording, or otherwise, without the prior
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