Introduction to Quantitative Methods (MGMT2012)

Tutorial Sheet – Simulation

Question One
Because of the cement shortage, investor Greedy Politician is allowed to import cement
duty free. The imported cement is used solely to satisfy surplus demand. Surplus demand
is given by the probability distribution below left. The ships arrive randomly (distribution
below right), because this is subject to availability of ships and cement for export. Each
ship carries exactly 200 bags. Each bag of imported cement unsold (surplus) costs the
investor $20 in storage costs and each bag short costs the investor $60 (stockout cost)
per month. The surplus bags are able to be used the following month. (Bags are in 000s
which we ignore to have manageable figures). Each bag of cement sold nets the investor
$100 and this figure does not include the stockout and storage figures. The investor does
NOT begin with any cement in stock.

Monthly Demand Probability Ship Arrivals Probability

(bags) per Month
100 0.1 0 0.1
200 0.2 1 0.5
300 0.3 2 0.2
400 0.4 3 0.2

Required
a) Construct the appropriate random number mapping for the random variables.
b) Simulate 10 months by using the random numbers given below.
c) What is the average monthly cost to manage this import policy?

Random Numbers To Be Used in the Simulation

Month 1 2 3 4 5 6 7 8 9 10
Demand 0.78 0.72 0.33 0.94 0.71 0.60 0.86 0.04 0.97 0.17
Ship Arrival 0.55 0.03 0.76 0.21 0.01 0.62 0.69 0.27 0.16 0.08

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Question Two
The Heartbreak Hotel routinely experiences no shows (people that make reservations for a room and don’t show
up) according to the distribution shown below during the peak season when the hotel is normally full. To reduce
the number of vacant rooms, the hotel overbooks three rooms; that is they accept three more reservations than
they have rooms for. On a day where the hotel experiences fewer than three no shows, there are not enough
rooms for those that have reservations. The hotel’s policy is to send them to a competing hotel down the street
at Heartbreak’s expense of $125. If the number of no shows is more than three, they have vacant rooms resulting
in an opportunity cost of $50 per room. Simulate 10 days of operation to calculate the average daily opportunity
loss.

No Shows Probability
0 0.10
1 0.13
2 0.31
3 0.16
4 0.21
5 0.09

Required
a) Construct the appropriate random number mapping for this random variable.
b) Simulate 10 days by using the random numbers given below. In your simulation, each day you are to
determine the number of no shows and the cost that follows (either sending away cost or vacant room
cost can be incurred).
c) What is the average daily opportunity cost? (Cost of sending away + empty rooms).
d) Very briefly, how you would replicate the simulation 100 times based on the average cost calculated
above (not changing any input)?
e) Very briefly, how you would replicate the simulation 100 times based on the average cost calculated
above, this time changing the overbooking level {0, 1, 2, 3, 4, 5, 6}?

Use these random numbers for the simulation.

0.37 0.42 0.01 0.06 0.61 0.85 0.88 0.52 0.41 0.21

Question Three
You are poor student who makes money on a daily basis selling phone cards and tutoring students. Table 4 shows
your possible income levels on any given day, and also your possible expenses. The probability distributions are
given. (We assume the income of any day is available for that day). You begin the day with $600 to your credit.
Table 4: Daily Income and Expenditure
Daily Income Daily Expenses
$ Probability $ Probability
350 0.40 300 0.10
400 0.20 400 0.45
450 0.30 500 0.30

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 500 0.10 600 0.15
Random numbers to be used
Income 18 87 68 49 39 80 39 7 5 89 91 42
Expenses 81 61 84 85 50 70 59 27 82 46 62 88

a) Construct the appropriate random number mapping for both random variables. Use integer rather than
decimal numbers.
b) Simulate 12 days income and expenditures using the random numbers given above. Remember you
start with $600 credit.
c) What is the ending balance at the end of the twelve days?
d) What percentage of the time will you be bankrupt?
e) Explain how you would simulate this problem in Excel.
Question Four
Video Works is a retail establishment that sells DVD players to its customers. Video Works orders 15 DVD players
(Q) from their supplier when their inventory reaches 5 units (R). Daily demand for DVD players varies according to
the probability distribution shown below. There is no lead time since orders made are received the next day in
time for sale. The cost to hold one unit in inventory for one day is $0.50. The cost to place an order to replenish
their inventory is $100. Stockout costs per unit are $40. Initial inventory is 15 units. Simulate this inventory policy
for 10 days and calculate average daily costs.

Daily Demand (units) Probability

0 0.05
1 0.05
2 0.20
3 0.30
4 0.30
5 0.10

d) Construct the appropriate random number mapping for the random variable.
e) Simulate 10 days by using the random numbers given below.
f) What is the average daily cost to manage this inventory policy?
g) Explain how we would evaluate ordering 10, 15, 20, and 25 DVD players when the reorder point
of 5 is reached, assuming we are using the same model and using Excel. Please be as specific as
possible.

Random Numbers To Be Used in the Simulation

Day 1 2 3 4 5 6 7 8 9 10
Demand 0.57 0.59 0.84 0.19 0.82 0.90 0.02 0.11 0.81 0.84