Table of Contents

Chapter 13 (Computer Simulation with Crystal Ball)

A Case Study: Freddie the Newsboy’s Problem (Section 13.1) 13.2–13.18

Bidding for a Construction Project (Section 13.2) 13.19–13.23
Project Management: Reliable Construction Co. (Section 13.3) 13.24–13.31
Cash Flow Management: Everglade Golden Years Co. (Section 13.4) 13.32–13.36
Financial Risk Analysis: Think-Big Development Co. (Section 13.5) 13.37–13.41
Revenue Management in the Travel Industry (Section 13.6) 13.42–13.47
Choosing the Right Distribution (Section 13.7) 13.48–13.67
Decision Making with Decision Tables (Section 13.8) 13.68–13.83

McGraw-Hill/Irwin 13.1 © The McGraw-Hill Companies, Inc., 2008

 Freddie the Newsboy

• Freddie runs a newsstand in a prominent downtown location of a major city.

• Freddie sells a variety of newspapers and magazines. The most expensive of

the newspapers is the Financial Journal.

• Cost data for the Financial Journal:

– Freddie pays $1.50 per copy delivered.
– Freddie charges $2.50 per copy.
– Freddie’s refund is $0.50 per unsold copy.

• Sales data for the Financial Journal:

– Freddie sells anywhere between 40 and 70 copies a day.
– The frequency of the numbers between 40 and 70 are roughly equal.

McGraw-Hill/Irwin 13.2 © The McGraw-Hill Companies, Inc., 2008

 Spreadsheet Model for Applying Simulation

A B C D E F
1 Freddie the Newsboy
2
3 Data
4 Unit Sale Price $2.50
5 Unit Purchase Cost $1.50
6 Unit Salvage Value $0.50
7
8 Decision Variable
9 Order Quantity 60
10
11 Simulation Minimum Maximum
12 Demand 55 Discrete Uniform 40 70
13
14 Sales Revenue $137.50
15 Purchasing Cost $90.00
16 Salvage Value $2.50
17
18 Profit $50.00

McGraw-Hill/Irwin 13.3 © The McGraw-Hill Companies, Inc., 2008

 Application of Crystal Ball

• Four steps must be taken to use Crystal Ball on a spreadsheet model:

1. Define the random input cells.

2. Define the output cells to forecast.

3. Set the run preferences.

4. Run the simulation.

McGraw-Hill/Irwin 13.4 © The McGraw-Hill Companies, Inc., 2008

 Step 1: Define the Random Input Cells

• A random input cell is an input cell that has a random value.

• An assumed probability distribution must be entered into the cell rather than a
single number.

• Crystal Ball refers to each such random input cell as an assumption cell.

• Procedure to define an assumption cell:

1. Select the cell by clicking on it.
2. If the cell does not already contain a value, enter any number into the cell.
3. Click on the Define Assumption button.
4. Select a probability distribution from the Distribution Gallery.
5. Click OK to bring up the dialogue box for the selected distribution.
6. Use the dialogue box to enter parameters for the distribution (preferably referring
to cells on the spreadsheet that contain these parameters).
7. Click on OK.

McGraw-Hill/Irwin 13.5 © The McGraw-Hill Companies, Inc., 2008

 Crystal Ball Distribution Gallery

McGraw-Hill/Irwin 13.6 © The McGraw-Hill Companies, Inc., 2008

 Crystal Ball Uniform Distribution Dialogue Box

McGraw-Hill/Irwin 13.7 © The McGraw-Hill Companies, Inc., 2008

 Step 2: Define the Output Cells to Forecast

• Crystal Ball refers to the output of a computer simulation as a forecast, since it

is forecasting the underlying probability distribution when it is in operation.

• Each output cell that is being used to forecast a measure of performance is

referred to as a forecast cell.

• Procedure for defining a forecast cell:

1. Select the cell.
2. Click on the Define Forecast button in the Crystal Ball tab or toolbar, which brings
up the Define Forecast dialogue box.
3. This dialogue box can be used to define a name and (optionally) units for the
forecast cell.
4. Click on OK.

McGraw-Hill/Irwin 13.8 © The McGraw-Hill Companies, Inc., 2008

 Crystal Ball Define Forecast Dialogue Box

McGraw-Hill/Irwin 13.9 © The McGraw-Hill Companies, Inc., 2008

 Step 3: Set the Run Preferences

• Setting run preferences refers to such things as choosing the number of trials to
run and deciding on other options regarding how to perform the simulation.

• This step begins by clicking on the Run Preferences button on the Crystal Ball
tab or toolbar.

• The Run Preferences dialogue box has five tabs to set various types of options.

• The Trials tab allows you to specify the maximum number of trials to run for
the computer simulation.

McGraw-Hill/Irwin 13.10 © The McGraw-Hill Companies, Inc., 2008

 The Crystal Ball Run Preferences Dialogue Box

McGraw-Hill/Irwin 13.11 © The McGraw-Hill Companies, Inc., 2008

 Step #4: Run the Simulation

• To begin running the simulation, click on the Start Simulation button.

• Once started, a forecast window displays the results of the computer

simulation as it runs.

• The following can be obtained by choosing the corresponding option under the
View menu in the forecast window display:
– Frequency chart
– Statistics table
– Percentiles table
– Cumulative chart
– Reverse cumulative chart

McGraw-Hill/Irwin 13.12 © The McGraw-Hill Companies, Inc., 2008

 The Frequency Chart for Freddie’s Profit

McGraw-Hill/Irwin 13.13 © The McGraw-Hill Companies, Inc., 2008

 More Results for Freddie’s Profit

McGraw-Hill/Irwin 13.14 © The McGraw-Hill Companies, Inc., 2008

 Certainty that Profit ≥ $40

McGraw-Hill/Irwin 13.15 © The McGraw-Hill Companies, Inc., 2008

 How Accurate Are the Simulation Results?

• An important number provided by the simulation is the mean profit of $45.94.

• This sample average provides an estimate of the true mean of the distribution.
The true mean might be somewhat different than $45.94.

• The mean standard error (on the Statistics Chart) of $0.62 gives some
indication of how accurate the estimate might be. The true mean will typically
(approximately 68% of the time) be within the mean standard error of the
estimated value.
– It is about 68% likely that the true mean profit is between $45.32 and $46.56.

• The mean standard error can be reduced by increasing the number of trials.
However, cutting the mean standard error in half typically requires
approximately ƒour times as many trials.

McGraw-Hill/Irwin 13.16 © The McGraw-Hill Companies, Inc., 2008

Precision Control: Expanded Define Forecast Dialogue Box

McGraw-Hill/Irwin 13.17 © The McGraw-Hill Companies, Inc., 2008

 Results with Precision Control

1000 trials were required to get the 95% confidence interval around the mean under $1.

McGraw-Hill/Irwin 13.18 © The McGraw-Hill Companies, Inc., 2008

 Bidding for a Project: Reliable Construction Co.

• Reliable Construction Co. is bidding to construct a new plant for a major

manufacturer.
• Reliable estimates the cost of the project to be $4.55 million, There also is an
additional cost of approximately $50,000 for preparing the bid.
• Three other construction companies also were invited to submit bids for the
project.
– Competitor 1 is known to use a 30 percent profit margin, but are unpredictable
bidders because of an inability to accurately estimate the true cost of the project.
Previous bids have ranged from 5% below the expected cost to 60% above.
– Competitor 2 uses a 25% profit margin, but is more accurate at predicting the true
cost. In the past, they have missed this profit margin by up to 15% in either
direction.
– Competitor 3 is unusually accurate in estimating project cost. It is equally likely to
set its profit margin anywhere between 20% and 30%.

Question: How much should Reliable bid for this project?

McGraw-Hill/Irwin 13.19 © The McGraw-Hill Companies, Inc., 2008

Spreadsheet Model for Applying Computer Simulation
A B C D E
1 Reliable Construction Co. Contract Bidding
2
3 Data
4 Our Project Cost ($million) 4.550
5 Our Bid Cost ($million) 0.050
6
7 Competitor Bids Competitor 1 Competitor 2 Competitor 3
8 Bid ($million) 5.839 5.688 5.688
9
10 Distribution Triangular Triangular Uniform
11
12 Competitor Distribution Parameters (Proportion of Our Project Cost)
13 Minimum 95% 110% 120%
14 Most Likely 130% 125%
15 Maximum 160% 140% 130%
16
17 Competitor Distribution Parameters ($millions)
18 Minimum 4.323 5.005 5.460
19 Most Likely 5.915 5.688
20 Maximum 7.280 6.370 5.915
21
22 Minimum Competitor
23 Bid ($million) 5.688
24
25 Our Bid ($million) 5.4
26
27 Win Bid? 1 (1=yes, 0=no)
28
29 Profit ($million) 0.800

McGraw-Hill/Irwin 13.20 © The McGraw-Hill Companies, Inc., 2008

 Triangular Distribution for Competitor 2

McGraw-Hill/Irwin 13.21 © The McGraw-Hill Companies, Inc., 2008

 Results for Reliable’s Bidding Problem

McGraw-Hill/Irwin 13.22 © The McGraw-Hill Companies, Inc., 2008

 Results for Reliable’s Bidding Problem

McGraw-Hill/Irwin 13.23 © The McGraw-Hill Companies, Inc., 2008

 Project Management: Reliable Construction Co.

• Reliable Construction Co. has won the bid to construct a new plant for a major
manufacturer.

• The contract includes a large penalty if construction is not completed by the

deadline 47 weeks from now.

• There are 14 tasks that need to be completed to finish the project.

– (a) excavate, (b) foundation, (c) rough wall, (d) roof, (e) exterior plumbing,
(f) interior plumbing, (g) exterior siding, (h) exterior painting, (i) electrical work,
(j) wallboard, (k) flooring, (l) interior painting, (m) exterior fixtures, (n) interior
fixtures.
– For each task, three estimates of their completion time have been made—a most-
likely, an optimistic, and a pessimistic estimate

Question: What is the probability that the project will complete by the
deadline?

McGraw-Hill/Irwin 13.24 © The McGraw-Hill Companies, Inc., 2008

 Project Network for Reliable Construction Co.
START 0 Activity Code

A. Excavate
A 2
B. Foundation
C. Rough wall

B 4 D. Roof
E. Exterior plumbing

10 F. Interior plumbing
C
G. Exterior siding
H. Exterior painting

D 6 E 4 I 7 I. Electrical work
J. Wallboard

K. Flooring
L. Interior painting
G 7 F 5 M. Exterior fixtures
N. Interior fixtures

J 8

H 9

K 4 L 5

M 2
N 6

FINISH 0
McGraw-Hill/Irwin 13.25 © The McGraw-Hill Companies, Inc., 2008
 The Triangular Distribution for an Activity Duration

Triangular distribution

0 o m p

Elapsed time

McGraw-Hill/Irwin 13.26 © The McGraw-Hill Companies, Inc., 2008

Spreadsheet Model for Applying Computer Simulation

A B C D E F G H I
1 Simulation of Reliable Construction Co. Project
2
3 Activity
4 Immediate Time Estimates Start Time Finish
5 Activity Predecessor o m p Time (triangular ) Time
6 A Š 1 2 3 0 2 2
7 B A 2 3.5 8 2 4.5 6.5
8 C B 6 9 18 6.5 11 17.5
9 D C 4 5.5 10 17.5 6.5 24
10 E C 1 4.5 5 17.5 3.5 21
11 F E 4 4 10 21 6 27
12 G D 5 6.5 11 24 7.5 31.5
13 H E, G 5 8 17 31.5 10 41.5
14 I C 3 7.5 9 17.5 6.5 24
15 J F, I 3 9 9 27 7 34
16 K J 4 4 4 34 4 38
17 L J 1 5.5 7 34 4.5 38.5
18 M H 1 2 3 41.5 2 43.5
19 N K, L 5 5.5 9 38.5 6.5 45
20
21 Project Completion 45

McGraw-Hill/Irwin 13.27 © The McGraw-Hill Companies, Inc., 2008

 The Triangular Distribution Dialogue Box

McGraw-Hill/Irwin 13.28 © The McGraw-Hill Companies, Inc., 2008

 Results for Reliable’s Project Duration

McGraw-Hill/Irwin 13.29 © The McGraw-Hill Companies, Inc., 2008

 Probability of Meeting the Project Deadline

McGraw-Hill/Irwin 13.30 © The McGraw-Hill Companies, Inc., 2008

 The Sensitivity Chart for Reliable’s Project

McGraw-Hill/Irwin 13.31 © The McGraw-Hill Companies, Inc., 2008

Cash Flow Management: Everglade Golden Years Co.

• Because of a temporary decline in business and some current or future

construction costs, the company is facing some negative cash flows in the next
few years.

• A long-term (10-year) loan can be taken now at a 7% annual interest rate.

• A series of short-term (1-year) loans can be taken as needed at 10% interest.

• The cash flows over the next 10 years are not certain. For each year, an
estimate of the minimum, most-likely, and maximum cash flow has been made.

Question: How large of a long-term loan should Everglade take out now?

McGraw-Hill/Irwin 13.32 © The McGraw-Hill Companies, Inc., 2008

 Projected Net Cash Flows

Projected Net Cash Flow

Year (millions of dollars)
2003 –8
2004 –2
2005 –4
2006 3
2007 6
2008 3
2009 –4
2010 7
2011 –2
2012 10

McGraw-Hill/Irwin 13.33 © The McGraw-Hill Companies, Inc., 2008

 Linear Programming Spreadsheet Model

A B C D E F G H I J K L
1 Everglade Cash Flow Management Problem
2
3 LT Rate 7%
4 ST Rate 10%
5
6 Start Balance 1 (all cash figures in millions of dollars)
7 Minimum Cash 0.5
8
9 Cash LT ST LT ST LT ST Ending Minimum
10 Year Flow Loan Loan Interest Interest Payback Payback Balance Balance
11 2003 -8 6.649 0.851 0.500 >= 0.5
12 2004 -2 3.401 -0.465 -0.085 -0.851 0.500 >= 0.5
13 2005 -4 8.207 -0.465 -0.340 -3.401 0.500 >= 0.5
14 2006 3 6.493 -0.465 -0.821 -8.207 0.500 >= 0.5
15 2007 6 1.607 -0.465 -0.649 -6.493 0.500 >= 0.5
16 2008 3 0.000 -0.465 -0.161 -1.607 1.266 >= 0.5
17 2009 -4 3.699 -0.465 0.000 0.000 0.500 >= 0.5
18 2010 7 0.000 -0.465 -0.370 -3.699 2.965 >= 0.5
19 2011 -2 0.000 -0.465 0.000 0.000 0.500 >= 0.5
20 2012 10 0.000 -0.465 0.000 0.000 10.035 >= 0.5
21 2013 -0.465 0.000 -6.649 0.000 2.920 >= 0.5

McGraw-Hill/Irwin 13.34 © The McGraw-Hill Companies, Inc., 2008

 Spreadsheet Model for Applying Computer Simulation

A B C D E F G H I J K L M N O P
1 Everglade Cash Flow Management Problem When Applying Simulation
2
3 LT Rate 7%
4 ST Rate 10%
5
6 Start Balance 1 (all cash figures in millions of dollars)
7 Minimum Cash 0.5
8
9 Cash Flow (Triangular Distribution) Simulated Balance
10 Most Cash LT LT ST LT ST Before ST Ending Minimum
11 Year Minimum Likely Maximum Flow Loan Interest Interest Payback Payback ST Loan Loan Balance Balance
12 2007 -9 -8 -7 -8.00 6.65 -0.35 0.85 0.50 >= 0.50
13 2008 -4 -2 1 -1.67 -0.47 -0.09 -0.85 -2.57 3.07 0.50 >= 0.50
14 2009 -7 -4 0 -3.67 -0.47 -0.31 -3.07 -7.01 7.51 0.50 >= 0.50
15 2010 0 3 7 3.33 -0.47 -0.75 -7.51 -4.89 5.39 0.50 >= 0.50
16 2011 3 6 9 6.00 -0.47 -0.54 -5.39 0.11 0.39 0.50 >= 0.50
17 2012 1 3 5 3.00 -0.47 -0.04 -0.39 2.60 0.00 2.60 >= 0.50
18 2013 -6 -4 -2 -4.00 -0.47 0 0 -1.86 2.36 0.50 >= 0.50
19 2014 4 7 12 7.67 -0.47 -0.24 -2.36 5.10 0.00 5.10 >= 0.50
20 2015 -5 -2 4 -1.00 -0.47 0 0 3.64 0.00 3.64 >= 0.50
21 2016 5 10 18 11.00 -0.47 0 0 14.17 0.00 14.17 >= 0.50
22 2017 -0.47 0 -6.65 0 7.05 7.05 >= 0.50

McGraw-Hill/Irwin 13.35 © The McGraw-Hill Companies, Inc., 2008

 Results for Everglade’s Ending Balance

McGraw-Hill/Irwin 13.36 © The McGraw-Hill Companies, Inc., 2008

Financial Risk Analysis: Think-Big Development Co.

• The Think-Big Development Co. is a major investor in commercial real estate

development projects.

• It has been considering taking a share in three large construction projects—a

high-rise office building, a hotel, and a shopping center.

• In each case, three years will be spent in construction, they will retain
ownership for another three years while establishing the property, and then sell
the property in the seventh year.

• Proposal: Don’t take any share in the high-rise, take a 16.5% share of the
hotel, and take a 13.11% share of the shopping center.

• Management wants risk analysis to be performed (with computer simulation)

to obtain a risk profile (frequency distribution) of what the total NPV might
turn out to be for this proposal.

McGraw-Hill/Irwin 13.37 © The McGraw-Hill Companies, Inc., 2008

 Estimated Cash Flows for 100 Percent Share
Hotel Project
Year Cash Flow ($1,000,000s)
0 –80
1 Normal (–80, 5)
2 Normal (–80, 10)
3 Normal (–70, 15)
4 Normal (+30, 20)
5 Normal (+40, 20)
6 Normal (+50, 20)
7 Uniform (200, 844)
McGraw-Hill/Irwin
Shopping Center Project
Year Cash Flow ($1,000,000s)
0 –90
1 Normal (–50, 5)
2 Normal (–20, 5)
3 Normal (–60, 10)
4 Normal (+15, 15)
5 Normal (+25, 15)
6 Normal (+40, 15)
7 Uniform (160, 600)
13.38 © The McGraw-Hill Companies, Inc., 2008
Spreadsheet Model for Applying Computer Simulation
A B C D E F G H
1 Simulation of Think-Big Development Co. Problem
2
3 Project Simulated
4 Cash Flow
5 Hotel Project: ($millions)
6 Construction Costs: Year 0 -80
7 Year 1 -80 Normal -80 5 (mean, st. dev.)
8 Year 2 -80 Normal -80 10 (mean, st. dev.)
9 Year 3 -70 Normal -70 15 (mean, st. dev.)
10 Revenue per Share Year 4 30 Normal 30 20 (mean, st. dev.)
11 Year 5 40 Normal 40 20 (mean, st. dev.)
12 Year 6 50 Normal 50 20 (mean, st. dev.)
13 Selling Price per Share Year 7 522 Uniform 200 844 (min, max)
14
15 Shopping Center Project
16 Construction Costs: Year 0 -90
17 Year 1 -50 Normal -50 5 (mean, st. dev.)
18 Year 2 -20 Normal -20 5 (mean, st. dev.)
19 Year 3 -60 Normal -60 10 (mean, st. dev.)
20 Revenue per Share Year 4 15 Normal 15 15 (mean, st. dev.)
21 Year 5 25 Normal 25 15 (mean, st. dev.)
22 Year 6 40 Normal 40 15 (mean, st. dev.)
23 Selling Price per Share Year 7 387.5 Uniform 160 615 (min, max)
24
25 Think Big's
26 Simulated Cash Flow
27 ($millions) Share
28 Year 0 -24.999 Hotel 16.50%
29 Year 1 -19.755 Shopping Center 13.11%
30 Year 2 -15.822
31 Year 3 -19.416 Cost of Capital 10%
32 Year 4 6.917
33 Year 5 9.878
34 Year 6 13.494
35 Year 7 136.931
36
37 Net Present Value ($millions) 18.120
McGraw-Hill/Irwin 13.39 © The McGraw-Hill Companies, Inc., 2008
 The Normal Distribution Dialogue Box

McGraw-Hill/Irwin 13.40 © The McGraw-Hill Companies, Inc., 2008

 Risk Profile (Frequency Chart) for Think-Big

McGraw-Hill/Irwin 13.41 © The McGraw-Hill Companies, Inc., 2008

 Transcontinental Airlines Overbooking Problem

• Transcontinental has a daily flight (excluding weekends) from San Francisco

to Chicago that is mainly used by business travelers.
• There are 150 seats available in a single cabin.
• The average fare per seat is $300. This is a nonrefundable fare, so no-shows
forfeit the entire fare.
• The fixed cost of operating the flight is $30,000.
• The average number of reservation requests for this flight has been 195, with a
standard deviation of 30.
• Only 80% of passengers with a reservation actually show up to take the flight,
so it makes sense to take more than 150 reservations (overbooking).
• If more passengers arrive to take the flight than there are seats, some
passengers must be “bumped”. The total cost (including rebooking, travel
vouchers, and lost goodwill) is estimated to be $450.

Question: How many reservations should Transcontinental accept for this

flight?

McGraw-Hill/Irwin 13.42 © The McGraw-Hill Companies, Inc., 2008

Spreadsheet Model for Applying Computer Simulation
A B C D E F
1 Transcontinental Airlines Overbooking
2
3 Data
4 Available Seats 150
5 Fixed Cost $30,000
6 Avg. Fare / Seat $300
7 Cost of Bumping $450
8
9 Mean Standard Dev.
10 Ticket Demand 195 Normal 195 30
11 Demand (rounded) 195
12
13 Reservations to Accept 190
14
15 Tickets Probability
16 Purchased to Show up
17 Number that Show 152 Binomial 190 80%
18
19
20 Number of Filled Seats 150 Ticket Revenue $45,000
21 Number Denied Boarding 2 Bumping Cost $900
22 Fixed Cost $30,000
23 Profit $14,100

McGraw-Hill/Irwin 13.43 © The McGraw-Hill Companies, Inc., 2008

 Binomial Distribution for Number that Show

McGraw-Hill/Irwin 13.44 © The McGraw-Hill Companies, Inc., 2008

 Frequency Chart for Profit

McGraw-Hill/Irwin 13.45 © The McGraw-Hill Companies, Inc., 2008

 Frequency Chart for Number of Filled Seats

McGraw-Hill/Irwin 13.46 © The McGraw-Hill Companies, Inc., 2008

 Frequency Chart for Number Denied Boarding

McGraw-Hill/Irwin 13.47 © The McGraw-Hill Companies, Inc., 2008

 Choosing the Right Distribution

• A continuous distribution is used if any values are possible, including both

integer and fractional numbers, over the entire range of possible values.

• A discrete distribution is used if only certain specific values (e.g., only some
integer values) are possible.

• However, if the only possible values are integer numbers over a relatively
broad range, a continuous distribution may be used as an approximation by
rounding any fractional value to the nearest integer.

McGraw-Hill/Irwin 13.48 © The McGraw-Hill Companies, Inc., 2008

 A Popular Central-Tendency Distribution: Normal

• Some value most likely (the mean)

• Values close to mean more likely
• Symmetric (as likely above as below mean)
• Extreme values possible, but rare
McGraw-Hill/Irwin 13.49 © The McGraw-Hill Companies, Inc., 2008
A Popular Central-Tendency Distribution: Triangular

• Some value most likely

• Values close to most likely value more common
• Can be asymmetric
• Fixed upper and lower bound
McGraw-Hill/Irwin 13.50 © The McGraw-Hill Companies, Inc., 2008
A Popular Central-Tendency Distribution: Lognormal

• Some value most likely

• Positively skewed (below mean more likely)
• Values cannot fall below zero
• Extreme values (high end only) possible, but rare
McGraw-Hill/Irwin 13.51 © The McGraw-Hill Companies, Inc., 2008
 The Uniform Distribution

• Fixed minimum and maximum value

• All values equally likely

McGraw-Hill/Irwin 13.52 © The McGraw-Hill Companies, Inc., 2008

 The Discrete Uniform Distribution

• Fixed minimum and maximum value

• All integer values equally likely

McGraw-Hill/Irwin 13.53 © The McGraw-Hill Companies, Inc., 2008

 A Three-Parameter Distribution: Weibull

• Random value above some number (location)

• Shape > 0 (usually ≤ 10)
• Shape < 3 becomes more positively-skewed (below mean more likely) until it
resembles exponential distribution (equivalent at Shape = 1)
• Symmetrical at Shape = 3.25, becomes negatively skewed above that
• Scale defines width
McGraw-Hill/Irwin 13.54 © The McGraw-Hill Companies, Inc., 2008
 A Four-Parameter Distribution: Beta

• Random value between some minimum and maximum

• Shape specified using two positive values (alpha, beta)
• Alpha < beta: positively skewed (below mean more likely)
• Beta < alpha: negatively skewed

McGraw-Hill/Irwin 13.55 © The McGraw-Hill Companies, Inc., 2008

 A Distribution for Random Events: Exponential

• Widely used to describe time between random events (e.g., time between arrivals)
• Events are independent
• Rate = average number of events per unit time (e.g., arrivals per hour)

McGraw-Hill/Irwin 13.56 © The McGraw-Hill Companies, Inc., 2008

 A Distribution for Random Events: Poisson

• Describes the number of times an event occurs during a given period of time or space
• Occurrences are independent
• Any number of events is possible
• Rate = average number of events per unit of time, assumed constant over time
McGraw-Hill/Irwin 13.57 © The McGraw-Hill Companies, Inc., 2008
 Yes-No Distribution

• Describes whether an event occurs or not

• Two possible outcomes: 1 (Yes) or 0 (No)

McGraw-Hill/Irwin 13.58 © The McGraw-Hill Companies, Inc., 2008

 Distribution for Number of Times an Event Occurs: Binomial

• Describes number of times an event occurs in a fixed number of trials (e.g., number of
heads in 10 flips of a coin)
• For each trial, only two outcomes are possible
• Trials independent
• Probability remains the same for each trial
McGraw-Hill/Irwin 13.59 © The McGraw-Hill Companies, Inc., 2008
 Distribution for Number of Trials Until Event Occurs: Geometric

• Describes number of trials until an event occurs (e.g., number of times to spin roulette
wheel until you win)
• Probability same for each trial
• Continue until succeed
• Number of trials unlimited
McGraw-Hill/Irwin 13.60 © The McGraw-Hill Companies, Inc., 2008
Distribution for Number of Trials Until n Events Occur: Negative Binomial

• Describes number of trials until an event occurs n times

• Same as geometric when Shape = n = 1
• Probability same for each trial
• Continue until nth success
• Number of trials unlimited
McGraw-Hill/Irwin 13.61 © The McGraw-Hill Companies, Inc., 2008
 The Custom Distribution (Weighted Values)

• Enter set of values with varying probabilities

• For each discrete value, enter Value and Probability

McGraw-Hill/Irwin 13.62 © The McGraw-Hill Companies, Inc., 2008

 The Custom Distribution (Combination)

• For discrete values, enter Value and Probability

• For a continuous range, enter Minimum, Maximum, and Probability

McGraw-Hill/Irwin 13.63 © The McGraw-Hill Companies, Inc., 2008

 Historical Demand Data for the Financial Times
A B C D E F
1 Freddie the Newsboy
2
3 Data Historical
4 Unit Sale Price $2.50 Demand
5 Unit Purchase Cost $1.50 Day Data
6 Unit Salvage Value $0.50 1 62
7 2 45
8 Decision Variable 3 59
9 Order Quantity 60 4 65
10 5 50
11 Simulation 6 64
12 Demand 55 7 56
13 8 51
14 Sales Revenue $137.50 9 55
15 Purchasing Cost $90.00 10 61
16 Salvage Value $2.50 11 40
17 12 47
18 Profit $50.00 13 63
19
20 14
15 68
67
21
22 16
17 67
68
23
24 18
19 54
55
25
26 20
21 48
40
27
28 22
23 49
55
29
30 24
25 45
42
31
32 26
27 66
65
33
34 28
29 53
65
35
36 30
31 53
52
37
38 32
33 46
43
39
40 34
35 48
58
41
42 36
37 57
43
43
44 38
39 54
58
45
46 40
41 70
43
47
48 42
43 60
42
49
50 44
45 68
62
51
52 46
47 55
66
53
54 48
49 50
47
55
56 50
51 63
40
57
58 52
53 47
48
59 54 49
60 55 41
61 56 42
62 57 64
63 58 45
64 59 59
65 60 70

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 Procedure for Fitting the Best Distribution to Data

1. Gather the data needed to identify the best distribution to enter into an assumption
cell.

2. Enter the data into the spreadsheet containing your simulation model.

3. Select the cell that you want to define as an assumption cell that contains the
distribution that best fits the data.

4. Choose Define Assumption from the Crystal Ball tab or toolbar, which brings up the
Distribution Gallery dialogue box.

5. Click the Fit button on the dialogue box, which brings up the Fit Distribution
dialogue box.

6. Use the Range box in this dialogue box to enter the range of the historical data in
your worksheet.

7. Click OK.
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 The Fit Distribution Dialogue Box

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 Comparison Chart Showing Best Fit

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 Decision Making with Decision Tables

• Many simulation models include at least one decision variable

– Examples: Order quantity, Bid, Number of reservations to accept

• Crystal Ball can be used to evaluate a particular value of the decision variable
by providing a wealth of output for the forecast cells.

• However, this approach does not identify an optimal solution for the decision
variable(s).

• Trial and error can be used to try different values of the decision variable(s).
– Run a simulation for each, and see which one provides the best estimate of the
chosen measure of performance.

• The Decision Table tool in Crystal Ball does this approach in a systematic
way.

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 Procedure for Defining a Decision Variable

1. Select the cell containing the decision variable.

2. If the cell does not already contain a value, enter any number into the cell.

3. Click on the Define Decision button in the Crystal Ball tab or toolbar, which
brings up the Define Decision Variable dialogue box.

4. Enter the lower and upper limit of the range of values to be simulated for the
decision variable.

5. Click on either Continuous or Discrete to define the type of variable.

6. If Discrete is selected in Step 5, use the Step box to specify the difference
between the successive possible values (not just those to be simulated).

7. Click on OK.

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 Define Decision Variable Dialogue Box

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 Decision Table: Specify Target Cell

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 Decision Table: Specify Decision Variable(s) to Vary

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 Decision Table: Specify Options

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 The Decision Table for Freddie’s Order Quantity

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Overlay Chart Comparing Order Quantities of 55 and 60

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 Trend Chart for Freddie’s Order Quantity

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 Decision Variable for Reliable’s Bidding Problem

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 Decision Table: Specify Target Cell

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 Decision Table: Specify Decision Variable

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 Decision Table: Specify Options

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 Decision Table for Reliable’s Bid

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 Decision Table for Transcontinental’s
Reservations to Accept

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 Trend Chart for Transcontinental’s
Reservations to Accept

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