A

DISSERTATION REPORT
ON
STUDY OF SIMULATION MODELLING
FOR
DECISION MAKING
(IN PARTIAL FULFILLMENT OF MASTERS DEGREE IN
BUSINESS ADMINISTRATION)

BY
MS. CHAITALI SANJEEV GHODKE
(IT)
UNDER THE GUIDANCE OF
PROF. POONAM RAWAT

M.A.E.E.RS
MAHARASHTRA INSTITUTE OF TECHNOLOGY
MBA DEPARTMENT (DMSR)
KOTHRUD, PUNE 411038
2014-2015

ACKNOWLEDGEMENT
On the very outset of this Dissertation report, I would like to extend
my sincere & heartfelt obligation towards all the personages who
have helped me in this endeavour. Without their active guidance,
help, cooperation & encouragement, I would not have made headway
in the dissertation.
I

firstly

owe

my

thanks

&

gratitude

to

our

Principal,

DR. L.K.KSHIRSAGAR without whose support my project would

not have been successful.
I am ineffably indebted to DR. MAHESH ABALE for conscientious
guidance and encouragement to accomplish this assignment.
I am extremely thankful and pay my gratitude to my faculty
guide PROF. POONAM RAWAT for her valuable guidance and
support on completion of this project in its presently.
I also acknowledge with a deep sense of reverence, my gratitude
towards my parents and member of my family, who has always
supported me morally as well as economically.
Any omission in this brief acknowledgement does not mean lack of
gratitude.

Thanking You
Chaitali Ghodke

DECLARATION
This Dissertation is a presentation of my original research
work. Wherever contributions of others are involved, every
effort is made to indicate this clearly, with due reference to
the

literature,

and

acknowledgement

of

collaborative

research and discussions.

The work was done under the guidance of Professor Poonam
Rawat, at the MAEERs Maharashtra Institute of Technology,
MBA Department.

Date:
Ghodke
Place: PUNE

Chaitali S

INDEX

Sr.

Topic

No.

Page
no.

1.

Introduction

1-19

2.

Literature Review

20-22

3.

Research Methodology

23-27

a)

Topic of Research

23

b)

Objectives

23

c)

Significance of Study

23

d)

Scope of Research

24

f)

Data Collection

24

4.

Data Analysis

28-41

5.

Research Findings, Recommendations & Conclusion

42-47

6.

Bibliography

48-50

TABLE OF FIGURES

Figure
No
1
2

Topic
Components of Decision-Making
Flowchart depicting Decision-Making

Page
No
4
7

process
Levels of decision making

11

Role of Information Systems

12

Classification of applications of
information systems

13

Organisational usage of Information

System

15

Simulation Modelling Process

37

CHAPTER 1
INTRODUCTION

INTRODUCTION: IT INDUSTRY OVERVIEW:The information technology (IT) field is a segment of engineering focused on developing,
installing, and implementing computer systems and applications to store, process, and receive

data electronically. IT can be divided into three broad categories: hardware, software, and the
Internet. Hardware refers to the physical equipment of a computer, such as motherboards,
memory chips, and microprocessors. Software includes the programs that tell the hardware
exactly what to do and how to do it. The Internet is composed of numerous global networks
that are connected to each other.
Recent trends that have impacted the field of information technology include downsizing of
computer systems and replacing big mainframe computers with client-server architecture that
allows users greater computing flexibility and increased access to data; and the rapid growth
of the Internet and World Wide Web, which has revolutionized information sharing through
real-time video conferencing, e-mail services, online research, help lines, and long-distance
telephone calls. Internet use on handheld and tablet devices, such as iPhones, iPads, Kindles,
and Nooks, through wireless networks has revolutionized people's access to technology.
Computer manufacturers and software companies hire a wide range of professionals with
many employers located in certain areas, like Northern California, Seattle, and parts of the
East Coast. IT employment opportunities vary by industry segment. Within the hardware and
software branches of the computer industry, many positions overlap and not every company
will hire people to fill positions in each basic segment: design, programming, administration,
sales, and service.
Jobs in the design and programming segments include designers who research and evaluate
the market or existing technology to find opportunities for improvements or new product
design. Programmers write the coded instructions that make computers work properly;
systems programmers write the instructions that make different computers and peripherals
work together; and software programmers write instructions for how computers should
respond to various input and what on-screen displays should be generated.
Positions in administration and sales include computer administrators who are in charge of
daily operations of different kinds of computer systems; network administrators, who attempt
to isolate the causes of problems and fix them if a network server goes down; and sales
representatives, who work for computer manufactures to market and advertise their products.
Sales representatives may also work in retail stores selling products directly to consumers.
Computer service is a broad category of careers with positions that include systems setup
specialists, technical support specialists, and computer repairers.

The U.S. Department of Labor reports that as of May 2012 there were approximately 3.5
million people employed in computer occupations, of which about 1.4 million people worked
in jobs related to software development and programming. Information technology weathered
the recession of 2007 to 2009 better than many other industries, shedding only 1 percent of its
workforce in 2009 and then growing to surpass its 2008 employment numbers by 2010.
Employment opportunities for computer professionals, including software engineers, systems
administrators, network administrators, computer systems analysts, database administrators,
and support specialists are expected to increase through 2022, according to the U.S. Bureau
of Labor Statistics.
To succeed in this field, computer professionals need flexibility, a formal education, must
keep up with the latest technology, and need a solid understanding of computer basics.
However, the technology of today may be obsolete in months, if not weeks, and only those
individuals who work to remain on the cutting edge will have long-term growth potential
during their career.
CONCEPTUAL BACKGROUND:INTRODUCTION TO DECISION MAKING & ITS PROCESS:Transition from industrial society to information and knowledge society has its impact on
social, economic and cultural aspect of life. There are only few aspects of life now- a-days
which are unaffected by information technology. In recent years, information systems
technology have become crucial and is playing a critical role in contemporary society and
dramatically is changing economy and business. Business is conducted in a global
environment and simply could not serve without computer based information systems.
Furthermore, we are entering the information age because of information technology and
information systems usage. The use of information systems especially is often understood to
be changing the way business and organisations work as well as help man- agers reduce
uncertainty in decision making.
Lucey (2005) emphasises the decision focus of his definition of information systems. He
observed that information systems is a system to convert data from internal and external
sources into information and to communicate that information in an appropriate form to
managers at all levels in all functions to enable them to make timely and effective decisions

for planning and controlling the activities for which they are responsible. Decision making is
often seen as the centre of what managers do, something that engages most of managers
time. In order to take decisions, managers need the right information to serve a wider range of
needs. In fact, information has long regarded as a very important aspect of decision making in
the business environment because in- formation gives power to decision makers.
For the last twenty years, different kinds of information systems are developed for different
purposes, depending on the need of the business. Transaction Process Systems (TPS) function
in operational level to process large amount of data for routine business transactions of the
organization, Office Automation Systems (OAS) support data workers and Knowledge Work
Systems (KWS) support professional workers. Higher-level systems include Management
Information Systems (MIS) and Decision Support Systems (DSS). Expert System (ES)
applies the expertise of decision makers to solve specific, unstructured problems. At the
strategic level of management, there is Executive Support Systems (ESS). Group Decision
Support Systems (GDSS) and the more generally described Computer Supported
Collaborative Work (CSCW) systems aid group level decision making of a semi structured or
unstructured decision.

Figure 1: Components of Decision-Making

DECISION MAKING
DEFINITION:-The thought process of

selecting

a logical choice from

the

available options. When trying to make a good decision, a person must weight the
positives and negatives of each option, and consider all the alternatives.

For effective decision making, a person must be able to forecast the outcome of each
option as well, and based on all these items, determine which option is the best for
that particular situation.
Small business owners and managers make decisions on a daily basis, addressing
everything from day-to-day operational issues to long-range strategic planning. The
decision-making process of a manager can be broken down into six distinct steps.
Although each step can be examined at length, managers often run through all of the
steps quickly when making decisions. Understanding the process of managerial
decision-making can improve your decision-making effectiveness.
Identify ProblemsThe first step in the process is to recognize that there is a decision to be made.
Decisions are not made arbitrarily; they result from an attempt to address a
specific problem, need or opportunity.
A supervisor in a retail shop may realize that he has too many employees on
the floor compared with the day's current sales volume, for example, requiring
him to make a decision to keep costs under control.
Seek InformationManagers seek out a range of information to clarify their options once they
have identified an issue that requires a decision. Managers may seek to
determine potential causes of a problem, the people and processes involved in
the issue and any constraints placed on the decision-making process.
Brainstorm Solutions
Having a more complete understanding of the issue at hand, managers move
on to make a list of potential solutions. This step can involve anything from a
few seconds of thought to a few months or more of formal collaborative
planning, depending on the nature of the decision.
Choose an Alternative
Managers weigh the pros and cons of each potential solution, seek additional
information if needed and select the option they feel has the best chance of
success at the least cost. Consider seeking outside advice if you have gone
through all the previous steps on your own; asking for a second opinion can
provide a new perspective on the problem and your potential solutions.

 Implement the Plan

There is no time to second guess yourself when you put your decision into
action. Once you have committed to putting a specific solution in place, get all
of your employees on board and put the decision into action with conviction.
That is not to say that a managerial decision cannot change after it has been
enacted; savvy managers put monitoring systems in place to evaluate the
outcomes of their decisions.
Evaluate Outcomes
Even the most experienced business owners can learn from their mistakes.
Always monitor the results of strategic decisions you make as a small business
owner; be ready to adapt your plan as necessary, or to switch to another
potential solution if your chosen solution does not work out the way you
expected.

CONCEPT OF DECISION-MAKING
o Decision-making is a cognitive process that results in the
selection of a course of action among several alternative
scenarios.
o Decision-making is a daily activity for any human being. There
is no exception about that. When it comes to business
organizations, decision-making is a habit and a process as
well.
o Effective and successful decisions result in profits, while
unsuccessful

ones

decision-making

is

cause
the

losses.

most

Therefore,

critical

process

corporate
in

any

organization.
o In a decision-making process, we choose one course of action
from a few possible alternatives. In the process of decisionmaking, we may use many tools, techniques, and perceptions.

o In addition, we may make our own private decisions or may

prefer a collective decision.
o Usually, decision-making

is

hard.

Majority

of

corporate

decisions involve some level of dissatisfaction or conflict with

another party.

DECISION-MAKING PROCESS
Following are the important steps of the decision-making process.
Each step may be supported by different tools and techniques.

Figure 2: Flowchart depicting Decision-Making process

Step 1: Identification of the Purpose of the Decision
In this step, the problem is thoroughly analysed. There are a couple of questions one should
ask when it comes to identifying the purpose of the decision.

What exactly is the problem?

Why the problem should be solved?

Who are the affected parties of the problem?

Does the problem have a deadline or a specific time-line?

Step 2: Information Gathering

A problem of an organization will have many stakeholders. In addition, there can be dozens
of factors involved and affected by the problem.
In the process of solving the problem, you will have to gather as much as information related
to the factors and stakeholders involved in the problem. For the process of information
gathering, tools such as 'Check Sheets' can be effectively used.
Step 3: Principles for Judging the Alternatives
In this step, the baseline criteria for judging the alternatives should be set up. When it comes
to defining the criteria, organizational goals as well as the corporate culture should be taken
into consideration.
As an example, profit is one of the main concerns in every decision making process.
Companies usually do not make decisions that reduce profits, unless it is an exceptional
case. Likewise, baseline principles should be identified related to the problem in hand.
Step 4: Brainstorm and Analyse the Choices
For this step, brainstorming to list down all the ideas is the best option. Before the idea
generation step, it is vital to understand the causes of the problem and prioritization of
causes.
For this, you can make use of Cause-and-Effect diagrams and Pareto Chart tool. Cause-andEffect diagram helps you to identify all possible causes of the problem and Pareto chart
helps you to prioritize and identify the causes with the highest effect. Then, you can move
on generating all possible solutions (alternatives) for the problem in hand.
Step 5: Evaluation of Alternatives
Use your judgment principles and decision-making criteria to evaluate each alternative. In
this step, experience and effectiveness of the judgment principles come into play. You need
to compare each alternative for their positives and negatives.

Step 6: Select the Best Alternative

Once you go through from Step 1 to Step 5, this step is easy. In addition, the selection of the
best alternative is an informed decision since you have already followed a methodology to
derive and select the best alternative.
Step 7: Execute the decision:
Convert your decision into a plan or a sequence of activities. Execute your plan by yourself
or with the help of subordinates.
Step 8: Evaluate the Results:
Evaluate the outcome of your decision. See whether there is anything you should learn and
then correct in future decision making. This is one of the best practices that will improve
your decision-making skills.

IMPORTANCE OF DECISION MAKING:1. Implementation of managerial function: Without decision making different
managerial function such as planning, organizing, directing, controlling, staffing
cant be conducted. In other words, when an employee does, s/he does the work
through decision making function. Therefore, we can say that decision is important
element to implement the managerial function.
2. Pervasiveness of decision making: the decision is made in all managerial
activities and in all functions of the organization. It must be taken by all staff.
Without decision making any kinds of function is not possible. So it is pervasive.
3. Evaluation of managerial performance: Decisions can evaluate managerial
performance. When decision is correct it is understood that the manager is qualified,
able and efficient. When the decision is wrong, it is understood that the manager is
disqualified. So decision making evaluate the managerial performance.
4. Helpful in planning and policies: Any policy or plan is established through
decision making. Without decision making, no plans and policies are performed. In
the process of making plans, appropriate decisions must be made from so many

alternatives. Therefore decision making is an important process which is helpful in

planning.
5. Selecting the best alternatives: Decision making is the process of selecting the
best alternatives. It is necessary in every organization because there are many
alternatives. So decision makers evaluate various advantages and disadvantages of
every alternative and select the best alternative.
6. Successful;

operation

of

business: Every

individual,

departments

and

organization make the decisions. In this competitive world; organization can exist
when the correct and appropriate decisions are made. Therefore correct decisions
help in successful operation of business.
MANAGEMENT INFORMATION SYSTEM & DECISION MAKING:The type of information required by decision makers in a company is directly related to:

the level of management decision making

the amount of structure in the decision situations managers face

The levels of management decision making that must be supported by information

technology in a successful organization (independently of its size, shape, and participants),
are often shown as a managerial pyramid
Strategic management: As part of a strategic planning process top executives
i.

develop overall organizational goals, strategies, policies, and

ii.

monitor the strategic performance of the organization and its overall direction
in the political, economic, and competitive business environment

Tactical management: Business unit managers and business professionals in self-directed

teams

i.

Develop short- and medium-range plans, schedules, budgets and specify

policies, procedures, and business objectives for their sub-units of the
company, and

ii.

Allocate resources and monitor the performance of their organizational subunits, including departments, divisions, process teams, project teams, and
other workgroups.

Operational management: Operating managers and members of self-directed teams

i.

Develop short-range plans (e.g. weekly production schedules), and

ii.

Direct the use of resources and the performance of tasks according to

procedures and within budgets and schedules they establish for the teams and
other workgroups of the organization.

Figure 3: Levels of Decision Making

Decision maker at different levels of the organization are making more or less structured
decisions. Typically there are three types of decision structure:

Unstructured decisions (usually related to the long-term strategy of the organization);

Semi-structured decisions (some decision procedures can be pre-specified but not enough to
lead to a definite recommended decision);
Structured decisions (the procedure to follow, when a decision is needed, can be specified in
advance).
With respect to the information system, it can be any organized combination of people,
hardware, software, communication networks, data resources, and policies and procedures
that stores, retrieves, transforms, and disseminates information in an organization.
There are three vital roles that information systems can perform for a business enterprise:
support of business processes and operations, support of decision making by employees and
managers, and support of strategies for competitive advantage see the figure below

Figure 4: Role of Information Systems

The applications of information systems that are implemented in today's business world can
be classified as either operations or management information systems see the figure, below

Figure 5: Classification of applications of information systems

Operations Support Systems (OSS) produce a variety of information products for internal
and external use, such as processing business transactions, controlling industrial processes,
supporting enterprise communications and collaborations, and updating corporate databases
effectively. They do not emphasize the specific information products that can best be used by
managers. Further processing by management information systems is usually required.
The management classifications of information systems can be structured in four main groups
of systems
o Management Information Systems (MIS): provide information in the form of reports
and displays to managers and many business professionals that support their day-today decision-making needs.

o Usually the information has been specified in advance to adequately meet the
expectations on operational and tactical levels of the organization, where the decision
making situations are more structured and better defined.
o Decision Support Systems (DSS) are computer-based information systems that
provide interactive information support to managers and business professionals during
the decision-making process.
o DSS use analytical models, specialized databases, a decision maker's own insights and
judgments, and an interactive, computer-based modelling process to support semistructured business decisions.
o Executive Information Systems (EIS) or Executive Support Systems (ESS) are
information systems that combine many of the futures of MIS and DSS. Here the
information is presented in forms tailored to the preferences of the executives using
the system, such as graphical user interface, customized to the executives graphics
displays, exception reporting, trend analysis, and abilities to 'drill-down' and retrieve
displays of related information quickly at lower levels of detail.
o Specialized Processing
Systems (PS) are information
systems characterized as
ORGANIZATIONAL
LEVEL
business systems, strategic information systems, knowledge management
TYPEfunctional
OF
systems, and
expert systems. KNOWLEDGEMANAGEMENT
DECISION
OPERATIONAL
STRATEGIC

STRUCTURED

ACCOUNTS
RECEIVABLE

TPS

ELECTRONIC PRODUCTION
COST OVERRUNS
SCHEDULING

MIS

OAS
SEMISTRUCTURED

BUDGET
PREPARATION
PROJECT
SCHEDULING

DSS

KWS
UNSTRUCTURED

FACILITY
LOCATION

PRODUCT DESIGN

ESS
NEW PRODUCTS
NEW MARKETS

Figure 6: Organisational usage of Information System

It is important to realize that business applications of information systems in the real world
are typically integrated combinations of all these types of information systems. In practice, all
these different types and roles of information systems are combined into integrated or CrossFunctional Business Information Systems that provide a variety of functions.
Thus, most information systems are designed to produce information and support decision
making for various levels of management and business functions, as well as perform recordkeeping and transaction-processing chores.

Whenever you analyse or work with an information system, you probably see that it provides
information for a variety of managerial levels and business functions.

ROLE OF MIS IN DECISION MAKING:Management information systems

can help you make valid

decisions by providing accurate and up-to-date information and

performing

analytic

functions.

You

have

to

make

sure

the

management information system you choose can work with the

information formats available in your company and has the features
you need. Suitable management information systems can structure
the basic data available from your company operations and records
into reports to present you with guidance for your decisions.
Management information systems combine hardware, software and
network products in an integrated solution that provides managers
with data in a format suitable for analysis, monitoring, decisionmaking and reporting. The system collects data, stores it in a
database and makes it available to users over a secure network.
InformationWhen you base your decisions on data available from management
information systems, they reflect information that comes from the
operations of your company. Management information systems take
data generated by the working level and organize it into useful
formats. Management information systems typically contain sales
figures, expenses, investments and workforce data. If you need to
know how much profit your company has made each year for the
past five years to make a decision, management information
systems can provide accurate reports giving you that information.
Managers need rapid access to information to make decisions about
strategic, financial, marketing and operational issues. Companies
collect vast amounts of information, including customer records,

sales data, market research, financial records, manufacturing and

inventory data, and human resource records.
However, much of that information is held in separate departmental
databases, making it difficult for decision makers to access data
quickly. A management information system simplifies and speeds
up information retrieval by storing data in a central location that is
accessible via a network. The result is decisions that are quicker
and more accurate.
Data CollectionManagement information systems bring together data from inside
and outside the organization. By setting up a network that links a
central database to retail outlets, distributors and members of a
supply chain, companies can collect sales and production data
daily, or more frequently, and make decisions based on the latest
information.
ScenariosThe capability to run scenarios is a key decision-making tool. Some
management information systems have this feature built in, while
others can provide the information required for running scenarios
on other applications, such as spreadsheets. Your decision is
influenced by what happens if you decide a certain way. What-if
scenarios show you how different variables change when you make
a decision.
You can enter reduced staff levels or increased promotion budgets
and see what happens to revenue, expenses and profit for different
levels of cuts or increases. Management information systems play a
critical role in making realistic scenarios possible.
Collaboration-

In situations where decision-making involves groups, as well as

individuals, management information systems make it easy for
teams to make collaborative decisions. In a project team, for
example, management information systems enable all members to
access the same essential data, even if they are working in different
locations.
ProjectionsAny decisions you make result in changes in the projected company
results and may require modifications to your business strategy and
overall goals. Management information systems either have trend
analysis built in or can provide information that lets you carry out
such an analysis.
Typical business strategies include projections for all fundamental
operating results. A trend analysis allows you to show what these
results would be in the current situation and how they will change
once you have implemented the decisions you have taken. The new
values form the basis of your strategic approach going forward.
Management information systems help decision-makers understand
the implications of their decisions. The systems collate raw data
into reports in a format that enables decision-makers to quickly
identify patterns and trends that would not have been obvious in
the

raw

data.

Decision-makers

can

also

use

management

information systems to understand the potential effect of change. A

sales manager, for example, can make predictions about the effect
of a price change on sales by running simulations within the system
and asking a number of what if the price was questions.
ImplementationWhile you make your decisions with specific goals in mind and have
the documentation from management information systems and

trend analysis to support your expectations, you have to track

company

results

to

make

sure

they

develop

as

planned.

Management information systems give you the data you need to

determine whether your decisions have had the desired effect, or
whether you have to take corrective action to reach your goals.
If specific results are not on track, you can use management
information systems to evaluate the situation and decide to take
additional measures if necessary.
PresentationThe reporting tools within management information systems enable
decision-makers to tailor reports to the information needs of other
parties. If a decision requires approval by a senior executive, the
decision-maker can create a brief executive summary for review. If
managers want to share the detailed findings of a report with
colleagues, they can create full reports and provide different levels
of supplementary data.

CHAPTER 2
LITERATURE REVIEW

LITERATURE REVIEW:Classical theories of choice in organisations emphasise decision making

as the making of rational choices on the basis of expectations about the
consequences of action for prior objectives, and organisational forms as
instruments for making those choices . It is likely that most organisations
would like to think they and their employees follow such rational
processes; in practice it is unlikely to be frequently achieved. The gap
between descriptive (what we are observed to do) and normative (what
we should do) decision making is extensive and in fact has widened over

recent years. There are potentially two paths by which the gap may be
narrowed. Firstly, and the view Payne et al. appear to take, is to attempt
to persuade decision makers to adopt more normative techniques.
Although this could certainly improve decision making, convincing
decision makers to do so is likely to be a significant hurdle. Conversely,
normative theories may be humanised by incorporating aspects of
human limitations and behaviour.
Managers face decisions every day involving uncertainty. If a company is
considering expanding a facility, there is uncertainty about whether future
demand will be high enough to make the expansion financially attractive.
The decision to expand, however, must be made before it is known what
future demand will be. The uncertainty in demand implies the risk that the
company will be hurt financially. Quantitative models can provide
tremendous insight and assistance in decision making. Unfortunately,
many quantitative models ignore the uncertainty present in the real
situations.
Sometimes this uncertainty is taken into account after a model is built
when some different what-if scenarios are considered, or a sensitivity
analysis is conducted, using methods similar to those discussed in
Supplement A. However, oftentimes there is uncertainty about a number
of factors, and it is difficult to do a complete scenario analysis. Computer
simulation is a methodology that allows one to model the uncertainty
directly and obtain a clear picture of the effect of that uncertainty on the
output quantities of a model. That is, simulation allows a decision maker
to accurately determine the effects of the uncertainty present in a
situation.

There are almost limitless ways the power of simulation can be used to
bring insight into managerial decision making, both in traditional OM areas

and throughout the organization. A few decision situations in which

simulation can and has been used effectively are listed here.
Financial analysis for new products, expansions, or any effort involving the
expenditure of funds now in the hope of future (but uncertain) payoffs.
Project planning and scheduling. Activity times are almost always
uncertain, which causes the actual completion time of the project to be
uncertain. Determining the customer service impacts of adding or
removing serving capacity. For example, what will be the effect of adding
a second drive-through window at a banking facility? Evaluating different
inventory

policies

while

taking

into

account

demand

uncertainty.

Evaluating different plant and supply chain policies, such as scheduling

and route assignments.
What are Decision Support Systems (DSS)?
Decision support consultants are employed or decision support systems
(DSS) are implemented in order to support decision-making in an
organisation. This assumes that the way in which decision-making actually
takes place in the organisation is understood. There are many models of
decision-making. People with a background in quantitative analysis would
typically have been exposed to rational decision-making methods, such as
Simon (1977) four-step decision model that incorporates intelligence,
decision, choice, review. This process is often accompanied by the
calculation of the subjective expected utility (SEU) or another way of
ranking alternatives to facilitate choosing the best option. It has been
observed that the outputs of decision support projects, often packaged as
decision support systems, are not used to support decision-making in the
way that was intended. This could imply some discrepancy between the
decision-making process that is being assumed or modelled and the way
decision-making occurs in practise. In order to test assumptions about
decision-making & the use of decision support technology, the literature
on decision-making was studied and compared to the way that a number
of mangers make decisions in practise.

What is Monte-Carlo Simulation?

Risk analysis is a part of every decision we make. We are constantly faced with uncertainty,
ambiguity & variability. And even though we have unprecedented access to information, we
cant accurately predict the future. Monte Carlo Simulation lets you see the all possible
outcomes of your decision & assess the impact of risk, allowing for better decision making
under uncertainty.
Monte Carlo simulation is a way to represent and analyse risk and uncertainty. It was called
"Monte Carlo" after the famous casino in the Principality of Monaco on the French Riviera
established in 1856. Instead of a roulette wheel or cards, Monte Carlo simulation generates
random numbers using a (pseudo)random number algorithm. In Monte Carlo simulation, the
uncertainty in key input quantities is represented as a probability distribution.
In standard Monte Carlo simulation, software samples a random value from each input
distribution and runs the model using those values. After repeating the process a number of
times (typically 100 to 10,000), it estimates probability distributions for the uncertain outputs
of the model from the random sample of output values. The larger the sample size, the more
accurate the estimation of the output distributions.
There are variants of Monte Carlo simulation that can be more efficient than simple random
sampling -- they converge faster reaching higher accuracy with a smaller sample size. Latin
hypercube sampling (LHS) divides up each uncertain input into n equiprobable intervals.
When generating its n runs, it samples exactly once from each interval. In so doing, it
achieves a more uniform sampling over each input distribution than standard Monte Carlo,
where the natural randomness usually results in more clumped sampling. For random LHS, it
samples at random from each interval, using the underlying distribution, and results are

guaranteed to be unbiased. For Median LHS, it uses the median of each of the n intervals.
Median LHS is not guaranteed to be unbiased, but in the vast majority of real applications it
is unbiased and it usually converges faster than simple Monte Carlo or random LHS.

CHAPTER 3
RESEARCH METHODOLOGY

RESEARCH METHODOLOGY:a) TOPIC OF RESEARCH: Study of Simulation modelling for decision making
b) OBJECTIVES:

To study different types of decision making structures used in

organization

To study the role of Information Systems in decision making

To evaluate various Decision Support System (DSS) models & tools

required for rational decision making.

To gain more insight to the use of Simulation Modelling to a greater

extent by the organizations.

c) SIGNIFICANCE OF STUDY:Decision making is an integral part of the functioning of any

organization. To facilitate decision making in this ever-competitive
world it is imperative that managers have the right information at
the right time to bridge the gap between need and expectation.
To facilitate better flow of information adequate Management
Information Systems (MIS) is the need of the hour. Thus it is

important to have an understanding of the MIS followed in an

organization by all levels of management in order to take decisions.
A management information system collects and processes data
(information) and provides it to managers at all levels who use it for
decision making, planning, program implementation, and control.
The MIS has many roles to perform like the decision support role,
the performance monitoring role and the functional support role.
Thus also the gaining importance of simulation modelling in DSS
should be imperatively studied so as to get a better understanding
of the changing technical scenario in order to compete with the
Techno-global world.

d) SCOPE OF RESEARCH:It is a desk research which explores the possibility of determining

the effectiveness of Simulation Modelling in particular and also it is
purely based on Secondary Data collection so it is subject to the
data already published in various research papers & websites so
forth. The reliability of data is rather perplexing and is constrained
strictly on its availability. Thus this research is purely study based
and the conclusions are general views about the study.
e) DATA COLLECTION:Data is facts and statistics collected together for reference or
analysis.
i.

Types of Data:
There are two different types of data that we use when we are
carrying our research projects. These two different types of
data are called Primary and Secondary data collection.

a. Primary Data:Primary data is data that we collect ourselves during the period of our
research e.g. Questionnaires, Observations, Interviews and so on. We
then use the data we have collected and noted down to begin the next
stage of our research which is the theory making and the understanding
of what we are researching.
Primary data is best used for ever evolving research because different
factors play roles in things we research and can lead to varying results
depending on the factor and how much of a role it plays on the
research.
b. Secondary Data:Secondary data is data that has already been collect and we use for
reference or to gain knowledge from other peoples experiences e.g.
published books, Government publications, Journals and the internet.
We then use this data to add to the Primary data that we have collected
and use it to combine different peoples opinions and base a theory
with evidence to back this point up.
Secondary data is best used to add other existing evidence and proof to
the Primary data that we have collected, we are better using Secondary
data as reference and to gain the knowledge that we need to begin our
own research processes. Sources of Data:Primary Data Sources:
o Survey
Survey is most commonly used method in social sciences,
management, marketing and psychology to some extent. Surveys can
be conducted in different methods.
o Questionnaire
Questionnaire is the most commonly used method in survey.
Questionnaires are a list of questions either an open-ended or close
-ended for which the respondent give answers. Questionnaire can be
conducted via telephone, mail, live in a public area, or in an institute,
through electronic mail or through fax and other methods.
o Interview
Interview is a face-to-face conversation with the respondent. It is slow,
expensive, and they take people away from their regular jobs, but they
allow in-depth questioning and follow-up questions.
o Observations

Observations can be done while letting the observing person know that
he is being observed or without letting him know. Observations can
also be made in natural settings as well as in artificially created
environment.
Secondary Data Sources:
o Published Printed Sources
There are varieties of published printed sources. Their credibility
depends on many factors. For example, on the writer, publishing
company and time and date when published. New sources are preferred
and old sources should be avoided as new technology and researches
bring new facts into light.

Books
Books are available today on any topic that you want to
research. The uses of books start before even you have selected
the topic. After selection of topics books provide insight on
how much work has already been done on the same topic and
you can prepare your literature review. Books are secondary

source but most authentic one in secondary sources.

Journals/periodicals
Journals and periodicals are becoming more important as far as
data collection is concerned. The reason is that journals provide
up-to-date information which at times books cannot and
secondly, journals can give information on the very specific
topic on which you are researching rather talking about more

general topics.
Magazines/Newspapers
Magazines are also effective but not very reliable. Newspaper
on the other hand is more reliable and in some cases the
information can only be obtained from newspapers as in the

case of some political studies.

o Published Electronic Sources
As internet is becoming more advance, fast and reachable to the
masses; it has been seen that much information that is not available in

printed form is available on internet. In the past the credibility of

internet was questionable but today it is not. The reason is that in the
past journals and books were seldom published on internet but today
almost every journal and book is available online. Some are free and
for others you have to pay the price.
E-journals: e-journals are more commonly available than
printed journals. Latest journals are difficult to retrieve without
subscription but if your university has an e-library you can
view any journal, print it and those that are not available you

can make an order for them.

General Websites; Generally websites do not contain very
reliable information so their content should be checked for

the reliability before quoting from them.

Weblogs: Weblogs are also becoming common. They are
actually diaries written by different people. These diaries are as

ii.

reliable to use as personal written diaries.

Data Collection Methods:This research being purely desk research uses Secondary Data Collection
method solely.
Sources:
o Books
o Published electronic sources
E-journals
General Websites
Weblogs
E-Research documents

CHAPTER 4
DATA ANALYSIS

DATA ANALYSIS:PROCESS AND MODELING IN DECISION-MAKING:

There are two basic models in decision-making:
Rational models
Normative model
The rational models are based on cognitive judgments and help in selecting the
most logical and sensible alternative. Examples of such models include: decision
matrix analysis, Pugh matrix, SWOT analysis, Pareto analysis and decision trees,
selection matrix, etc.
A rational decision making model takes the following steps:

Identifying the problem

Identifying the important criteria for the process and the result
Considering all possible solutions
Calculating the consequences of all solutions and comparing the

probability of satisfying the criteria

Selecting the best option.

The normative model of decision-making considers constraints that may

arise in making decisions, such as time, complexity, uncertainty, and
inadequacy of resources.
According to this model, decision-making is characterized by:

Limited information processing - A person can manage only a limited

amount of information.
Judgmental heuristics - A person may use shortcuts to simplify the
decision making process.

Satisficing - A person may choose a solution that is just "good

enough".

Dynamic Decision-Making:
Dynamic decision-making (DDM) is synergetic decision-making involving interdependent
systems, in an environment that changes over time either due to the previous actions of the
decision-maker or due to events that are outside of the control of the decision-maker.
These decision-makings are more complex and real-time.
Dynamic decision-making involves observing how people used their experience to control
the system's dynamics and noting down the best decisions taken thereon.
Sensitivity Analysis:
Sensitivity analysis is a technique used for distributing the uncertainty in the output of a
mathematical model or a system to different sources of uncertainty in its inputs.
From business decision perspective, the sensitivity analysis helps an analyst to identify cost
drivers as well as other quantities to make an informed decision. If a particular quantity has
no bearing on a decision or prediction, then the conditions relating to quantity could be
eliminated, thus simplifying the decision making process.
Sensitivity analysis also helps in some other situations, like:

Resource optimization

Future data collections

Identifying critical assumptions

To optimize the tolerance of manufactured parts

Static and Dynamic Models

Static models:

Show the value of various attributes in a balanced system.

Work best in static systems.

Do not take into consideration the time-based variances.

Do not work well in real-time systems however, it may work in a dynamic system
being in equilibrium

Involve less data.

Are easy to analyse.

Produce faster results.

Dynamic models:

Consider the change in data values over time.

Consider effect of system behaviour over time.

Re-calculate equations as time changes.

Can be applied only in dynamic systems.

Simulation Techniques
Simulation is a technique that imitates the operation of a real-world process or system over
time. Simulation techniques can be used to assist management decision making, where
analytical methods are either not available or cannot be applied.
Some of the typical business problem areas where simulation techniques are used are:

Inventory control

Queuing problem

Production planning

Operations Research Techniques

Operational Research (OR) includes a wide range of problem-solving techniques involving
various advanced analytical models and methods applied. It helps in efficient and improved
decision-making.
It encompasses techniques such as simulation, mathematical optimization, queuing theory,
stochastic-process models, econometric methods, data envelopment analysis, neural
networks, expert systems, decision analysis, and the analytic hierarchy process.
OR techniques describe a system by constructing its mathematical models.

Heuristic Programming
Heuristic programming refers to a branch of artificial intelligence. It consists of programs
that are self-learning in nature.
However, these programs are not optimal in nature, as they are experience-based techniques
for problem solving.
Most basic heuristic programs would be based on pure 'trial-error' methods.
Heuristics take a 'guess' approach to problem solving, yielding a 'good enough' answer,
rather than finding a 'best possible' solution.

Group Decision-Making
In group decision-making, various individuals in a group take part in collaborative decisionmaking.
Group Decision Support System (GDSS) is a decision support system that provides support
in decision making by a group of people. It facilitates the free flow and exchange of ideas
and information among the group members. Decisions are made with a higher degree of
consensus and agreement resulting in a dramatically higher likelihood of implementation.
Following are the available types of computer based GDSSs:

Decision Network: This type helps the participants to communicate with each other
through a network or through a central database. Application software may use
commonly shared models to provide support.

Decision Room: Participants are located at one place, i.e. the decision room. The
purpose of this is to enhance participant's interactions and decision-making within a
fixed period of time using a facilitator.

Teleconferencing: Groups are composed of members or sub groups that are

geographically dispersed; teleconferencing provides interactive connection between
two or more decision rooms. This interaction will involve transmission of
computerized and audio visual information.

TYPES OF DECISION SUPPORT SYSTEM (DSS):Decision Support Systems (DSS) are a class of computerized information system that
support decision-making activities. DSS are interactive computer-based systems &
subsystems intended to help decision makers use communications technologies, data,
documents, knowledge and/or models to complete decision process tasks.
A decision support system may present information graphically and may include an expert
system or artificial intelligence (AI). It may be aimed at business executives or some other
group of knowledge workers.

Typical information that a decision support application might gather and present would be,
(a) Accessing all information assets, including legacy and relational data sources; (b)
Comparative data figures; (c) Projected figures based on new data or assumptions; (d)
Consequences of different decision alternatives, given past experience in a specific context.
There are a number of Decision Support Systems. These can be categorized into five types:

Communication-driven DSS: Most communications-driven DSSs are targeted at

internal teams, including partners. Its purpose are to help conduct a meeting, or for
users to collaborate. The most common technology used to deploy the DSS is a web
or client server. Examples: chats and instant messaging softwares, online
collaboration and net-meeting systems.

Data-driven DSS: Most data-driven DSSs are targeted at managers, staff and also
product/service suppliers. It is used to query a database or data warehouse to seek
specific answers for specific purposes. It is deployed via a main frame system,
client/server link, or via the web. Examples: computer-based databases that have a
query system to check (including the incorporation of data to add value to existing
databases.

Document-driven DSS: Document-driven DSSs are more common, targeted at a

broad base of user groups. The purpose of such a DSS is to search web pages and find
documents on a specific set of keywords or search terms. The usual technology used
to set up such DSSs are via the web or a client/server system.

Knowledge-driven DSS: Knowledge-driven DSSs or 'knowledgebase' are they are

known, are a catch-all category covering a broad range of systems covering users
within the organization setting it up, but may also include others interacting with the
organization - for example, consumers of a business. It is essentially used to provide
management advice or to choose products/services. The typical deployment
technology used to set up such systems could be client/server systems, the web, or
software running on stand-alone PCs.

Model-driven DSS: Model-driven DSSs are complex systems that help analyse
decisions or choose between different options. These are used by managers and staff

members of a business, or people who interact with the organization, for a number of
purposes depending on how the model is set up - scheduling, decision analyses etc.
These DSSs can be deployed via software/hardware in stand-alone PCs, client/server
systems, or the web.
SIMULATION MODEL BASED DECISION MAKING:Simulation is a broad term that refers to an approach for imitating the behaviour of an actual
or anticipated human or physical system. The terms simulation and model, especially
quantitative and behavioural models, are closely linked. From my perspective, a model
shows the relationships and attributes of interest in the system under study. A quantitative or
behavioural model is by design a simplified view of some of the objects in a system. A model
used in a simulation can capture much detail about a specific system, but how complex the
model is or should be depends upon the purpose of the simulation that will be "run" using the
model. With a simulation study and when simulation provides the functionality for a DSS,
multiple tests, experiments or "runs" of the simulation are conducted, the results of each test
are recorded and then the aggregate results of the tests are analysed to try to answer specific
questions. In a simulation, the decision variables in the model are the inputs that are
manipulated in the tests.
Simulation-based DSS refers to a category of DSS in which simulation is used as one
of the (main) components of the system. The decision problem consists of a set of
available decision alternatives and an objective function representing the preferences
of the decision maker. The alternatives are compared using an appropriate simulation
model, which may incorporate uncertain data. The decision alternatives constitute the
input parameters of the simulation model. Then, based on the simulation output, the
optimal decision is distinguished or alternatives are ranked.
Advantages associated with the use of simulation in DSS and optimization problems
are widely acknowledged in the literature.

Simulation models can be used for extremely complex problems, where

analytical approaches are not available. They explicitly account for physical
processes and give a more complete description of reality. They permit to

incorporate various interactions and correlations and capture more of the real
world complexities.

Simulation models have the ability to incorporate random events and

imperfect information. They are more general than analytical models for
uncertainty and usually have fewer assumptions and impose no restrictions
on the probability distributions involved.

Simulation models can conveniently be combined with other analytical, or

numerical methods and provide a single integrated model.

Simulation approaches can readily be combined with different optimization

methods and techniques.

Simulation is used to model efficiently a wide variety of systems that are important to
managers. A simulation is basically an imitation, a model that imitates a real-world process or
system. In business and management, decision makers are often concerned with the operating
characteristics of a system. One way to measure or assess the operating characteristics of a
system is to observe that system in actual operation. However, in many types of situations the
cost of direct observation can be very high.
Furthermore, changing some of the relationships or parameters within a system on an
experimental basis may mean waiting a considerable amount of time to collect results on all
the combinations that are of concern to the decision maker.
In business and management, a simulation is a mathematical imitation of a real-world system.
The use of computers to conduct simulations is not essential from a theoretical standpoint.
However, most simulations are sufficiently complex from a practical standpoint to require the
use of computers in running them. A simulation can also be considered to be an experimental
process. In a set of experimental runs, the decision maker actively varies some of the
parameters or relationships in the system. If the mathematical model behind the simulation is
valid, the results of the simulation runs will imitate the results of the real system if it were to
operate over some period of time.
In order to better understand the fundamental issues of simulation, an example is useful.
Suppose a regional medical centre seeks to provide air ambulance service to trauma and burn

victims over a wide geographic area. Issues such as how many helicopters would be best and
where to place them would be in question. Other issues such as scheduling of flight crews
and the speed and payload of various types of helicopters could also be important. These
represent decision variables that are to a large degree under the control of the medical centre.
There are uncontrollable variables in this situation as well. Examples are the weather and the
prevailing accident and injury rates throughout the medical centres service region.
Given the random effects of accident frequencies and locations, the analysts for the medical
centre would want to decide how many helicopters to acquire and where to place them.
Adding helicopters and flight crews until the budget is spent is not necessarily the best course
of action. Perhaps two strategically placed helicopters would serve the region as efficiently as
four helicopters of some other type scattered haphazardly about. Analysts would be interested
in such things as operating costs, response times, and expected numbers of patients who
would be served. All of these operating characteristics would be impacted by injury rates,
weather, and any other uncontrollable factors as well as by the variables they are able to
control.
The medical centre could run their air ambulance system on a trial-and-error basis for many
years before they had any reasonable idea what combinations of resources would work well.
Not only might they fail to find the best or near-best combination of controllable variables,
but also they might very possibly incur an excessive loss of life as a result of poor resource
allocation. For these reasons, this decision-making situation would be an excellent candidate
for a simulation approach. Analysts could simulate having any number of helicopters
available. To the extent that their model is valid, they could identify the optimal number to
have to maximize service, and where they could best be stationed in order to serve the
population of seriously injured people who would be distributed about the service region. The
fact that accidents can be predicted only statistically means that there would be a strong
random component to the service system and that simulation would therefore be an attractive
analytical tool in measuring the system's operating characteristics.
MONTE CARLO SIMULATION:

There are several different strategies for developing a working simulation, but
two are probably most common. The first is the Monte Carlo simulation

approach. The second is the event-scheduling approach. Monte Carlo

simulation is applied where the passage of time is not incorporated into the
simulation model. Consider again the air ambulance example. If the
simulation is set up to imitate an entire month's worth of operations all at
once, it would be considered a Monte Carlo simulation. A random number of
accidents and injuries would generate a random number of flights with some
sort of average distance incorporated into the model. Operating costs and
possibly other operating values sought by the analysts would be computed.

The advantage of Monte Carlo simulation is that it can be done very quickly
and simply. Thus, many months of operations could be simulated in the
ambulance example. From the many months of operational figures, averages
and distributions of costs could readily be acquired. Unfortunately, there is
also a potentially serious disadvantage to the Monte Carlo simulation
approach. If analysts ignore the passage of time in designing the simulation,
the system itself may be oversimplified. In the air ambulance example, it is
possible to have a second call come in while a flight is in progress which
could force a victim to wait for a flight if no other helicopter is available. A
Monte Carlo simulation would not account for this possibility and hence
could contribute to inaccurate results.

This is not to say that Monte Carlo simulations are generally flawed. Rather,
in situations where the passage of time is not a critical part of the system
being modelled, this approach can Problem Solving and Decision Making
with Simulation Software

SIMULATION MODEL SCHEMATIC:-

Fixed (Known)
Inputs

Random
(Uncertain) Inputs

Simulation
model

Outputs/Performance
Measures

Decision
Variables
Figure 7: Simulation modelling process
Simulation is a decision analysis and support tool. Simulation software allows you to
evaluate, compare and optimize alternative designs, plans and policies. As such, it provides a
tool for explaining and defending decisions to various stakeholders.
Simulation should be used when the consequences of a proposed action, plan or design
cannot be directly and immediately observed (i.e., the consequences are delayed in time
and/or dispersed in space) and/or it is simply impractical or prohibitively expensive to test the
alternatives directly. For example, when implementing a strategic plan for a company, the
impacts are likely to take months (or years) to materialize.
Simulation is particularly valuable when there is significant uncertainty regarding the
outcome or consequences of a particular alternative under consideration. Probabilistic
simulation allows you deal with this uncertainty in a quantifiable way.
Perhaps most importantly, simulation should be used when the system under consideration
has complex interactions and requires the input from multiple disciplines.
In this case, it is difficult for any one person to easily understand the system. A simulation
model can act as the framework to integrate the various components in order to better
understand their interactions. As such, it becomes a management tool that keeps you focused
on the "big picture" without getting lost in unimportant details. Because simulation is such a

powerful tool to assist in understanding complex systems and to support decision-making, a

wide variety of approaches and tools exist.
Many special purpose simulators exist to simulate very specific types of systems. For
example, tools exist for simulating the movement of water (and contaminants) in an estuary,
the evolution of a galaxy, or the exchange rates for a set of currencies. The key attribute of
these tools is that they are highly specialized to solve a particular type of problem. In many
cases, these tools require great subject-matter expertise to use. In other cases, however, the
system being simulated may be so highly specified that using the tools is quite simple (i.e.,
the user is presented with a very limited number of options).
Other tools are not specialized to a particular type of problem. Rather, they are "tool kits"
or general purpose frameworks for simulating a wide variety of systems. There are a variety
of such tools, each tailored for a specific type of problem. What they all have in common,
however, is that they allow the user to model how a system might evolve or change over
time. Such frameworks can be thought of as high-level programming languages that allow
the user to simulate many different kinds of systems in a flexible way.
Perhaps the simplest and most broadly used general purpose simulator is the spreadsheet.
Although spreadsheets are inherently limited by their structure in many ways (e.g.,
representing complex dynamic processes is difficult, they cannot display the model structure
graphically, and they require special add-ins to represent uncertainty), because of their
ubiquity, they are very widely used for simple simulation projects (particularly in the business
world).
Other general purpose tools exist that are better able to represent complex dynamics, as well
as provide a graphical mechanism for viewing the model structure (e.g., an influence diagram
or flow chart of some type).
Although these tools are generally harder to learn to use than spreadsheets (and are typically
more expensive), these advantages allow them to realistically simulate larger and more
complex systems than can be done in a spreadsheet.
The general purpose tools can be broadly categorized as follows:

Discrete Event Simulators

These tools rely on a transaction-flow approach to modelling systems. Models consist of
entities (units of traffic), resources (elements that service entities), and control elements
(elements that determine the states of the entities and resources). Discrete simulators are
generally designed for simulating processes such as call centres, factory operations, and
shipping facilities in which the material or information that is being simulated can be
described as moving in discrete steps or packets. They are not meant to model the movement
of continuous material (e.g., water) or represent continuous systems that are represented by
differential equations.
Agent-Based Simulators
This is a special class of discrete event simulator in which the mobile entities are known as
agents. Whereas in a traditional discrete event model the entities only have attributes
(properties that may control how they interact with various resources or control elements),
agents have both attributes and methods (e.g., rules for interacting with other agents). An
agent-based model could, for example, simulate the behaviour of a population of animals that
are interacting with each other.
Continuous Simulators
This class of tools solves differential equations that describe the evolution of a system using
continuous equations. These type of simulators are most appropriate if the material or
information that is being simulated can be described as evolving or moving smoothly and
continuously, rather than in infrequent discrete steps or packets. For example, simulation of
the movement of water through a series of reservoirs and pipes can most appropriately be
represented using a continuous simulator. Continuous simulators can also be used to simulate
systems consisting of discrete entities if the number of entities is large so that the movement
can be treated as a flow.
Hybrid Simulators
These tools combine the features of continuous simulators and discrete simulators. That is,
they solve differential equations, but can superimpose discrete events on the continuously
varying system. GoldSim is a hybrid simulator.

 Who uses Monte Carlo simulation?

Many companies use Monte Carlo simulation as an important part of
their decision-making process. Here are some examples.

General Motors, Proctor and Gamble, Pfizer, Bristol-Myers Squibb,

and Eli Lilly use simulation to estimate both the average return and
the risk factor of new products. At GM, this information is used by
the CEO to determine which products come to market.

GM uses simulation for activities such as forecasting net income for

the corporation, predicting structural and purchasing costs, and
determining its susceptibility to different kinds of risk (such as
interest rate changes and exchange rate fluctuations).

Lilly uses simulation to determine the optimal plant capacity for

each drug.

Proctor and Gamble uses simulation to model and optimally hedge

foreign exchange risk.

Sears uses simulation to determine how many units of each product

line should be ordered from suppliersfor example, the number of
pairs of Dockers trousers that should be ordered this year.

Oil and drug companies use simulation to value "real options," such
as the value of an option to expand, contract, or postpone a project.

Financial planners use Monte Carlo simulation to determine optimal

investment strategies for their clients retirement.

EXAMPLE OF MONTE-CARLO SIMULATION:-

CHAPTER 5

RESEARCH FINDINGS,
RECOMMENDATIONS &
CONCLUSION

RESEARCH FINDINGS:Why Monte Carlo Simulation

The most important advantages of Monte Carlo include:

The probability distributions within the model can be easily and flexibly used, without
the need to approximate them;

Correlations and other relations and dependencies (such as if statements) can be

modelled without difficulty;

The level of mathematics required is quite basic;

Software like @RISK can automate the tasks involved in simulation;

The behaviour of and changes to the model can be investigated with great ease and
speed.

How Monte-Carlo Simulation works?

Monte Carlo simulation performs risk analysis by building models of possible results by
substituting a range of valuesa probability distributionfor any factor that has inherent
uncertainty. It then calculates results over and over, each time using a different set of random
values from the probability functions. Depending upon the number of uncertainties and the
ranges specified for them, a Monte Carlo simulation could involve thousands or tens of
thousands of recalculations before it is complete. Monte Carlo simulation produces
distributions of possible outcome values.
By using probability distributions, variables can have different probabilities of different
outcomes occurring. Probability distributions are a much more realistic way of describing
uncertainty in variables of a risk analysis. Common probability distributions include:
Normal Or bell curve. The user simply defines the mean or expected value and a
standard deviation to describe the variation about the mean. Values in the middle near the
mean are most likely to occur. It is symmetric and describes many natural phenomena such
as peoples heights. Examples of variables described by normal distributions include
inflation rates and energy prices.
Lognormal Values are positively skewed, not symmetric like a normal distribution. It is
used to represent values that dont go below zero but have unlimited positive potential.
Examples of variables described by lognormal distributions include real estate property
values, stock prices, and oil reserves.

Uniform All values have an equal chance of occurring, and the user simply defines the
minimum and maximum. Examples of variables that could be uniformly distributed include
manufacturing costs or future sales revenues for a new product.
Triangular The user defines the minimum, most likely, and maximum values. Values
around the most likely are more likely to occur. Variables that could be described by a
triangular distribution include past sales history per unit of time and inventory levels.
PERT- The user defines the minimum, most likely, and maximum values, just like the
triangular distribution. Values around the most likely are more likely to occur. However
values between the most likely and extremes are more likely to occur than the triangular; that
is, the extremes are not as emphasized. An example of the use of a PERT distribution is to
describe the duration of a task in a project management model.
Discrete The user defines specific values that may occur and the likelihood of each. An
example might be the results of a lawsuit: 20% chance of positive verdict, 30% change of
negative verdict, 40% chance of settlement, and 10% chance of mistrial.
During a Monte Carlo simulation, values are sampled at random from the input probability
distributions. Each set of samples is called an iteration, and the resulting outcome from that
sample is recorded. Monte Carlo simulation does this hundreds or thousands of times, and
the result is a probability distribution of possible outcomes. In this way, Monte Carlo
simulation provides a much more comprehensive view of what may happen. It tells you not
only what could happen, but how likely it is to happen.

Monte Carlo simulation provides a number of advantages over deterministic, or single-point

estimate analysis:
Probabilistic Results. Results show not only what could happen, but how likely
each outcome is.

 Graphical Results. Because of the data a Monte Carlo simulation generates, its
easy to create graphs of different outcomes and their chances of occurrence. This
is important for communicating findings to other stakeholders.
Sensitivity Analysis. With just a few cases, deterministic analysis makes it difficult
to see which variables impact the outcome the most. In Monte Carlo simulation,
its easy to see which inputs had the biggest effect on bottom-line results.
Scenario Analysis: In deterministic models, its very difficult to model different
combinations of values for different inputs to see the effects of truly different
scenarios. Using Monte Carlo simulation, analysts can see exactly which inputs
had which values together when certain outcomes occurred. This is invaluable for
pursuing further analysis.
Correlation of Inputs. In Monte Carlo simulation, its possible to model
interdependent relationships between input variables. Its important for accuracy
to represent how, in reality, when some factors goes up, others go up or down
accordingly.
An enhancement to Monte Carlo simulation is the use of Latin Hypercube sampling, which
samples more accurately from the entire range of distribution functions
A common misconception about Monte Carlo simulation is that the computational effort is
combinatorial (exponential) in the number of uncertain inputs -- making it impractical for
large models. This is true for simple discrete probability tree (or decision tree) methods. But,
in fact, the great advantage of Monte Carlo is that the computation is linear in the number of
uncertain inputs: It's proportional to the number of input distributions to be sampled.

COMPARISON OF SIMULATION TECHNIQUES:-

SIMULATION METHOD
ANALYTICAL

MONTE-CARLO

Gives exact results(given the

assumptions of the model)

Very flexible. There is

virtually no limit to the
analysis. Empirical
distributions can be handled

Once the model is developed,

Can generally be easily

output will generally be

extended and developed as

rapidly obtained.

required.

It need not always be

implemented on a computer

Easily understood by nonmathematicians.

paper analyses may suffice.

Generally requires restrictive

Usually requires a computer.

Calculations can take much

assumptions to make the

problem tractable.

Because it is less flexible

than Monte-Carlo. In

longer than analytical

particular, the scope for

models.

extending or developing a
model may be limited.

The model might only be

Solutions are not exact, but

understood by

depend on the number of

mathematicians. This may

repeated runs used to produce

cause credibility problems if

the output statistics. That is,

output conflicts with

all outputs are estimates.

preconceived ideas of
designers or management.

RECOMMENDATIONS:

The worksheet approach consumes considerable system resources, and therefore may
result in system lock-ups or other poor system performance when you need more than
a few thousand iterations of the simulation.

A single simulation can use multiple instances of the RAND () function, for
example. Multiplying that single simulation by 20,000 iterations can cause the
spreadsheet to bog down unbearably.

For these situations in which the worksheet approach is inadequate, we turn to Excel's
built-in programming language, Visual Basic for Applications (or "VBA").

Using the programming language we can write computer code which reads input from
a worksheet and writes output back to the worksheet.

Output can be in the form of printing a single output data row for each iteration
(constrained by the same limits on number of rows described above), or the VBA
code can tally the results itself and output only the final numbers (average, standard
deviation, range, etc. of multiple variables) to designated spreadsheet cells.

CONCLUSION:Simulation is truly an analytical tool with applications across the enterprise. Consider a
capital investment situation such as the launch of a new product. Engineering is involved in
the product design, during which simulation can be used to compare different design
congurations without having to actually build the product. For example, automakers use
computer simulation of cars to test design concepts. Operations is involved in facility design,
supply chain conguration and management, manufacturing, and distribution. All of these
areas lend themselves to simulation, which is probably the most common tool used in
comparing different facility layouts and operating plans. Marketing is involved in the market
development, distribution, sales, and customer support aspects of the new product. Since
there is typically much un- certainty in the launch of a new product, simulation is a valuable
tool for analysing the effects of uncertainties in market size, price sensitivities, and other
factors. Of course, nance is involved in the overall nancial attractiveness of the launch of
the new product, as well as in questions relating to the nancing of the capital investment.
These decisions involve much uncertainty, and simulation is a tool to help evaluate the risk
level of the project.

CHAPTER 6
BIBLIOGRAPHY

BIBLIOGRAPHY:

BOOK: Research Methodology: Methods and Techniques

BY: C.R.Kothari

E-BOOKS, CASE PAPERS & JOURNALS:1) Journal of Management and Marketing Research, Management
information systems and business decision making: review, analysis,
and recommendations
BY: Srinivas Nowduri , Bloomsburg University of Pennsylvania
LINK: http://www.aabri.com/manuscripts/10736.pdf
2) Beyond Accuracy: How Models of Decision Making Compare to
Human Decision Making, Master Thesis in Cognitive Science Lund
University Sweden June 2005
Author: Carl Christian Rolf
LINK: http://fileadmin.cs.lth.se/cs/Personal/Carl_Christian_Rolf/ccrmsccog.pdf
3) Simulation-based Optimization and Decision Making with Imperfect
Information
BY: FARZAD KAMRANI
LINK:
http://www.divaportal.org/smash/get/diva2:461227/FULLTEXT01.pdf
4) Management Information System And Decision Making Process In
Enterprise
BY: Predrag Ranisavljevi1, Tanja Spasi1, Ivana MladenoviRanisavljevi2, high Business School Of Leskovac, University Of Ni,
Faculty Of Technology Leskovac, Serbia
LINK:
http://emit.kcbor.net/Emit%20clanci%20za%20sajt/EMIT
%20Vol1%20No3/Management%20information%20system%20and
%20decision%20making%20process%20in.pdf
5) The Role of MIS in Management Decision Making-Theoretical
Approach
BY: Mihane Berisha-Namani(University of Pristina, Kosova)
LINK: http://manager.faa.ro/download/561_1211.pdf

WEBSITES:-

1) http://smallbusiness.chron.com/role-management-information-systemsdecisionmaking-63454.html
2) http://www.ijric.org/volumes/Vol5/1Vol5.pdf
3) http://yourbusiness.azcentral.com/role-management-information-systems-decisionmaking-1826.html
4) http://www.tutorialspoint.com/management_information_system/managerial_decision
_making.htm
5) http://notes.tyrocity.com/chapter-5-meaning-and-importance-of-decision-making/
6) http://www.dodccrp.org/files/IC2J_v1n1_02_Moffat.pdf
7) http://www.referenceforbusiness.com/management/Sc-Str/Simulation.html
8) http://www.ignou.ac.in/upload/Unit-11-55.pdf
9) https://www.uic.edu/classes/idsc/ids422/lect1.ppt
10) http://www.gdrc.org/decision/dss-types.html
11) https://onlinecampus.bu.edu/bbcswebdav/pid-843933-dt-content-rid2221759_1/courses/13sprgmetad715_ol/module_03a/metad715_m03l02t02_manage
mentinfosystems.html
12) http://www.slideshare.net/manukumarkm/source-of-data-in-research
13) http://adamowen.hubpages.com/hub/Understanding-The-Different-Types-ofResearch-Data
14) http://orsnz.org.nz/conf33/papers/p61.pdf
15) http://www.ioz.pwr.wroc.pl/Pracownicy/Mielczarek/supp_c.pdf
16) http://www.goldsim.com/Web/Introduction/WhentoSimulate/

17) http://www.vault.com/industries-professions/industries/information-technology.aspx

18) http://www.academia.edu/232471/Decision-making_Theory_and_practice
19) http://www.palisade.com/risk/monte_carlo_simulation.asp
20) http://www.epixanalytics.com/modelassist/AtRisk/Model_Assist.htm#Montecarlo/Ho
w_Monte_Carlo_Simulation_Works.htm
21) http://www.lumina.com/technology/monte-carlo-simulation-software/

MAEERS MAHARASHTRA INSTITUTE OF TECHNOLOGY

DEPARTMENT OF MANAGEMENT SCIENCES AND RESEARCH

Dissertation Proposal

Introduction of Topic:
The topic which interests me for exploring as a research report will be Simulation Modelling
for decision making. Decision making is an integral part of the functioning of any
organization. To facilitate decision making in this ever-competitive world it is imperative that
managers have the right information at the right time to bridge the gap between need and
expectation.
My aim would be to achieve a greater insight into the topic & also get enough information
about the queries regarding the subject as to why decision making is important to
organizations?, what are the benefits of MIS & DSS for decision making?, How Monte-Carlo
Simulation method proves to be of greater advantage in making quick & accurate decisions?
& also new techniques of using Simulation methods for greater speed & reliability in
obtaining better results.

Research Objectives:
I shall strive to achieve following objectives:

To study different types of decision making structures used in

organization

To study the role of Information Systems in decision making

To evaluate various Decision Support System (DSS) models & tools

required for rational decision making.

To gain more insight to the use of Simulation Modelling to a greater

extent by the organizations.

Research Methodology: It will be a desk research i.e. descriptive research which will
explore the possibility of determining the effectiveness of Simulation Modelling in particular
and also it will be purely based on Secondary Data collection so it will probably be subjected
to the data already published in various research papers & websites so forth.

Expected Contribution of Study: I shall try to recommend certain new upcoming

techniques of Simulation Methods which may be still unpracticed in organizations due to lack
of infrastructure or knowledge & also will try to enlighten on my area of research, its
advantages over other techniques as per my understanding & perception.

Chaitali Sanjeev Ghodke

This dissertation proposal is

accepted & forwarded
for approval

Approved/Not Approved

Dr. Mahesh Abale

Prof. Poonam Rawat

Professor & Head, MIT- DMSR