Simulation

Simulation is used where all else fail. It is often viewed as method of last resort. Simulation is a representation of reality through the use of model or other device, which will react in same manner as reality under a given set of conditions. Simulation is the use of system model that has designed the characteristics of reality in order to produce the essence of actual operation.

Why Simulation is used for solving real-life problems?

1. Simulation techniques allow experimentation with a model of the real-life system rather than the actual operating system. 2. Sometimes there is no sufficient time to allow the actual system to operate extensively. 3. The non-technical manager can comprehend simulation more easily than a complex mathematical model. 4. The use of Simulation models enables a manager to provide insights in to certain managerial problem.

Limitations of Simulation Technique:

a. Optimum results cannot be produced by simulation. b. Another difficulty lies in the quantification of the variables. c. In large & complex; it is difficult to make a computer program on account of large number of variable & the involved inter-relationships among them. d. Problems requiring computer act as a costly means of analysis. e. Other important limitation stem from too much tendency to rely on the simulation models.

Terms used:
Random Variable: It is a real valued function defined over a sample space associated with the outcome of a conceptual chance experiment. Random Variate: It refers to a particular outcome of an experiment.

Random Number: It refers to a uniform random variable or a numerical value assigned to a random variable following uniform probability density function (i.e. Normal, Poisson, Exponential etc.)

MONTE-CARLO SIMULATION:
Monte-Carlo technique is a special technique of simulating. The technique of Monte-Carlo involves the selection observation with in the simulation model. In the technique, random numbers are generated or associated with the calculated probability and form a simulated model of the real-life situation. Test model, validate it & then decide whether or not it is obligate.

APPLICATIONS: 1. 2. 3. 4. Applications to Inventory Control. Application to Queuing problems. Application to Capital-Budgeting. Application to Financial Planning.

ADVANTAGES: They are flexible & can be modified according to real situations. Easier to use than mathematical models. Advantageous to train people on simulated models before putting hands on real model. Offers solution by experimentation without interfering with real model. Easily understood by operating & non-technical staff. Difficulties & bottlenecks can be foreseen. Computer simulation can compress performance of system. DISADVANTAGES: Gives evaluating solutions but not solution techniques. Expensive. Not all situations can be evaluated.

Games Theory
The theory of games is nothing but a mathematical theory of conflicting situations. The object of the theory is to analyze and elaborate what constitutes rational behavior of each of the opponents in the course of a conflicting situation. The Game Theory may be defined as a body of knowledge that deals with making decisions when two or more intelligent and rational opponents are involved under conditions of conflict and competition. Game theory attempts to study decision-making in situations where two or more intelligent and rational opponents are involved under conditions of conflict and cooperation. The approach of game theory is to seek to determine a rivals most profitable counter-strategy to ones own best moves and to formulate the appropriate defensive measures. Applications: 1. Used by poker and chess players to win their games. 2. Army generals make use of this technique to plan war strategies. 3. It can be used to analyze a broad range of activities; including dating and mating strategies, legal and political negotiations, and economic behavior. 4. The game theory technique is designed to evaluate situations where individuals and organizations can have conflicting objectives. 5. helps in determining the best course of action for a firm in view of the expected counter moves from the competitors.

Basic Terinology
1. Two-Person Zero-sum Game: a game of two persons, in which the gains of one player are the losses of the other player, is called a Two Person zero-sum game. These are also known as rectangular games since they are represented by rectangular pay-off matrix.

2. Pay-off matrix: Main thing in the game theory are the concepts of strategies and payoffs. A strategy is a course of action taken by one of the participants in a game, and the payoff is the result or outcome of the strategy. Let us consider a game where As pay-off matrix is given by: Player B 1 a11 a12 . . a1n 2 a21 a22 . . a2n Player A : : : . . : : : . . : m am1 am2 . . amn thus in a pay-off matrix, the number of rows of the matrix corresponds to the number of courses of action of the player A which is always written on the left of the matrix, and the number of columns corresponds to the number of courses of the player B which is always written on the top of the matrix. Such matrix always shows the payments or gains to player A. if there is a negative entry in the table, it means that the payments are to be made by A to B. thus for the player B, the matrix always represents the losses, while for the player A, it represents the gains. Accordingly, the player A is called the maximizing player since the would like to maximize the gain, while the player B is called the minimizing player since he would like to minimize the losses. 3. Maximin principle: According to this principle, the player adopts a pessimistic attitude and plays safe i.e., his strategy is always that which results in the best out of the worst outcomes. In other words the player A decides to play that strategy which corresponds to the maximum of the minimum gains for his different courses of action. This is known as Maximin principle. 4. Minimax principle: Similarly, the player B would also like to play safe and in that case he selects that strategy which corresponds to the minimum of the maximum losses for his different courses of action and this is known as the Minimax Principle. 5. Optimal Strategy: A course of action or play which puts the player in the most preferred position, irrespective of the strategy of his competitors is called an optimal strategy. Any deviation from this strategy results in a decreased pay-off for the player. 6. Value of the game: It is the expected pay-off of play when all the players of the game follow their optimal strategy. Any

deviation from this strategy results in a decreased pay-off for the player.

Rule of Dominance
In general the rules of dominance are used to reduce the size of pay-off matrix by eliminating a course a course of action is said to be dominated by the other. The concept of dominance is especially useful for the evaluation of two person zero-sum games where a saddle point doesnt exist. These rules are Rule 1: If all elements in a row are less than or equal to the corresponding elements in another row, then that row is dominated and can be deleted from the matrix. Rule 2: If all the elements is a column are greater than or equal to the corresponding elements in another column, then that column is dominated and can be deleted from the matrix.

Linear Programming
Concepts LP is a mathematical modeling technique designed to optimize the usage of limited resources. Successful applications of LP exist in the areas of military, industry, agriculture, transportation, economics, health systems etc.. The usefulness of technique is enhanced by the availability of highly efficient computer codes. Many linear organization problems are characterized by the existence of two or more activities (variables) that complete for limited resources. The economists problem is to determine the best allocation of scarce resources to the activities. The operational objective of LP is to determine the levels of activities( values for controllable variables) that optimize a linear criterion subject to resource limitations and other conditions expressed by linear constraints. The general LPP calls for optimizing (maximizing/minimizing) a linear function of variables called the Objective Function subject to a set of linear equations and / or inequalities called the Constraints or Restrictions

Problem Formulation The procedure for mathematical formulation of LPP cosists of the following steps: Step1: To write down the decision variables of the problem.

Step2: To formulate the objective function to be optimized (Maximized or Minimized) as a linear function of the decision variables.

Step3: To formulate the other conditions of the problem such as resource limitation, market constraints; inter relations between variables etc, as linear inequations or equations in terms of the decision variables. Step 4: To add the non-negativity constraint from the considerations so that the negative values of the decision variables do not have any valid physical interpretation. The objective function, the set of constraint and the nonnegative constraint together form a LPP. Example 1. Reddy Mikks produces both interior and exterior paints from two raw materials, M1 and M2. the following table provides the basic data of the problem: Tons of raw material per ton of Maximum daily Exterior Paint Interior Paint availability (tons) Raw Material M1 6 4 Raw Material M2 1 2 Profit per ton (000 Rs.) 5 4

24 6

A market survey restricts the maximum daily demand of interior paint to 2 tons. Additionally, the daily demand for interior paint cant exceed that of exterior paint by more than 1 ton. Reddy Mikks want to determine the optimum product mix of interior and exterior paints that maximizes the total daily profit. Solution: Decision Variables : Let x1 = Tons produced daily of exterior paint x2 = Tons produced daily of interior paint Objective Function : in this problem objective is to maximize daily profit from both exterior paints and interior paints i.e., 5x1 + 4x2. The objective of company is Maximize Z = 5x1 + 4x2 Constraints: The raw materials expressed verbally as restrictions are

Usage of raw material by both paints Maximum raw material availability

From the data of the problem Usage of raw material M1 = 6x1 + 4x2 Usage of raw material M2 = 1x1 + 2x2 Therefore constraints can be specified as 6x1 + 4x2 24 1x1 + 2x2 6 x1, x2 0 Assumptions

LP model is designed in light of certain assumptions. These assumptions are: 1. The Model is Linearity: 2. The Model is Deterministic: This means that each coefficient (cj, aij, bi ) is fixed and known with certainty. There is no chance that these values can be changed. It is possible to evaluate the sensitivity of results to fluctuations in the parameters by sensitivity analysis. 3. The Model is Proportional: This condition follows directly from the linearity assumptions for the objective function and constraints. This means that the criterion and the constraints expand or contract proportionally to the level of each activity. For example, doubling the number of units of product X produced in the particular period results in doubling its cost contribution and doubling its labor and material requirements. 4. The Model is Additive: the value of the objective function for the given values of decision variables and the total sum of resources used, must be equal to the sum of the contributions (profit/cost) earned from each decision variable and the sum of the resources used by each decision variable respectively. E.g. the total profit earned by the sale of three products A, B and C must be equal to the sum of the profits earned separately from A, B and C. 5. The decision variables are Divisible: This means that fractional levels for the decision variables are permissible; specifically the objective function and constraints are continuous functions.

6. The decision variables are Non-negative: This means all the decision variables can take nonnegative values. i.e., it can take value either zero or more than zero. Applications: Linear programming has proved to be one of the most widely used technique of managerial decision making in business, industry and numerous other fields. Main applications areas are: 1. Industrial Applications: LP is extensively used to solve a variety of Industrial problems. In each of these applications, the general objective is to determine a plan for production and procurement in the time period under consideration. Few examples of Industrial applications are: a) Product Mix Problem: the problem is the selection of the optimal product mix to make best use of machine and man hours available while maximizing the firms profit. b) Blending Problem: In this problem the objective is to determine the combination of raw ingredients that will result in a satisfactory end product and minimize cost. e.g. the blending of petroleum products. c) Production Scheduling: This problem involves the determination of a production schedule that meets demand subject to various fluctuations. The objective is to meet demand and yet maintain reasonable inventory levels and employment levels, while minimizing the overall cost of production and inventory. d) Communication Industry: LP methods are used

in solving problems involving facilities transmission, switching, relaying etc.

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2. Management Applications: a) Profit Planning: LP has been applied for planning profits on a fiscal year basis to maximize profit margin from net investment in plant facilities and equipment, each on hand, and inventory. b) Media Selection Problem: In media selection problem, suppose the management decides to spend certain amount during the financial year to advertise its products using one or more of the potential advertising media available like newspapers, magazines, radio and television commercials etc. The allocation of advertising budget is to be made in such a way so the exposure of the companys product is maximized, subject to certain maximum expenditure in each media. c) Manpower Planning: LP technique can be used to make decisions for departmental staffing requirements in large restaurants, hospitals etc. for a given period of time. d) Traveling Salesman Problem: The problem of finding the shortest route for a salesman starting from a given city, visiting each of the specified cities, and the returning to the original point departure can be easily handled by the assignment technique of LP. 3. Administrative Applications: Administrative applications of LP are concerned with optimal usage of resources like men, machines and materials. LP helps an administrative incharge in knowing the

best possible manner to utilize his resources. LP can be used to make decisions for Departmental Staff Requirements for a given period of time. 4. Non Industrial applications: a) Agriculture : Among the agriculture applications, LP technique may be useful for land allocation and animal diet problem. LP may help in determining the allocation of land from different crops/vegetables so that a farmer can either minimize his costs or maximize profits, subject to certain crop requirements. b) Urban Department: LP has been used to analyze public expenditure planning, school busing, and drug control. Political redistricting and financial analysis of new community development processes have also been tackled with LP.

Advantages: 1. It helps in organization and study of the information in the same way that the scientific approach to the problem requires. This generally results in clear picture of the true problem which is as valuable and necessary as is the solution. 2. Many Management problems are so complex that the difficulty is encountered in planning and feasible solution. By using LP technique, the manager makes sure that he is considering the best solution. 3. With Lp the executive builds into his planning a true reflection of the limitations and restrictions under which he must operate.

4. Once a basic plan is arrived at through Lp, it can be re-evaluated for changing conditions. 5. Highlighting of bottlenecks in the production process is the most significant advantage of this technique. 6. It also helps the managers to have better understanding about the phenomenon and various activities of the organization for the organization construction of suitable mathematical model visualizing the relationship between variables if any and making improvement over them. 7. Optimal use of productive factors is its advantage.

Limitations 1. In LP problem, fractional values are permitted for the decision variables. However, many decision problems require that the solution for decision variables should be obtained in non-fractional values. Rounding off the values obtained by LP techniques may not result into an optimal solution in such cases. 2. In LP problems, coefficients in the objective function and the constraint equations must be completely known and they should not change during the period of study. 3. A primary requirement of Linear Programming is that the Objective Function must be linear. However Programming problems, which are nonlinear, arise quite frequently. It is occasionally possible to reformulate a non-linear Programming problem into the LP format so that the simplex

method can be applied. This , however, is the formulate exception not a rule. 4. It may possible one organization has multiple Objectives, LP cant be used in this case. Many real world problems are so complex, in terms of the number of variables and relationships constrained in them, that they tax the capacity of even the largest computer