Monte Carlo simulations are a powerful tool for predicting the outcome of complex systems. They make use of random sampling to generate a range of possible outcomes, and allow us to gain insight into the behavior of a system. This article will explain how Monte Carlo simulations work, including their history, the mathematics behind them, and their various applications. It will also discuss the advantages and disadvantages of Monte Carlo simulations in comparison to other methods.

Supply chain management is an essential component of any successful business. It requires the efficient coordination of resources and activities to create a product or service that meets customer needs. Monte Carlo simulations have become increasingly popular as a tool for analyzing supply chain model, as they provide an effective way to analyze large, complex systems. Monte Carlo simulations allow businesses to simulate various scenarios and gain insights into the behavior of their supply chains.

Monte Carlo Simulations (MCS) are becoming increasingly popular in the business world as a way to Supply Chain Model and understand complex supply chain processes. MCS can provide insight into how different variables interact within a system, such as a customer demand, inventory levels, lead times, and supplier performance. This article will explore the advantages of using an MCS approach to model supply chains, providing evidence of its effectiveness and discussing potential challenges.

Supply Chain Model ​

Taking your business down to its lowest possible operating cost typically involves changing (usually simplifying) processes.

When preparing a business case for changing your current processes, it is usually easy to nail down system costs but people costs are almost always problematic.

Even if you believe you can calculate them accurately, your stakeholders will each have their own views on the assumptions underlying your cost model and this can result in an impasse.

Here’s how I do it:

I’ve prepared a sample Monte Carlo simulation in Google Spreadsheets that you can review online and download as an Excel file.

Because the values in this file may change as I run different scenarios, I have taken a screenshot of the current settings and labelled the components of the spreadsheet.

Please click on the thumbnail image to follow the discussion below but refer to the Monte Carlo Simulation Google spreadsheet to explore how it works in detail.

Note that I have prepared a subsequent post that takes you through the spreadsheet in some detail and, for those who are fire walled from Google Docs, please click this link for an Excel version of the Cost Analysis Monte Carlo Spreadsheet Monte Carlo Simulations The first column .

Some Steps of Supply Chain Model

(1.) shows each of the activities that will be modeled. In this case, I have set out seven steps involved in manually processing a PO and paying the resulting invoice.

The next three columns (labeled 2, 3, and 4 in the thumbnail image) allow you to enter assumptions against the time taken to perform each activity

(2.), the fully loaded cost of the resource performing the work.

(3.), and the number of transactions per month

(4.).In the above screenshot, you can see that Activity “1. Create requisition” takes between 1 and 3 minutes to complete and the fully loaded cost of the resource creating the requisition is $90K to $110K (assuming some pretty significant overheads for this resource!). Each month, the organization prepares 10K to 20K purchase orders. Running a Monte Carlo simulation over these variables (FTE utilization: 130 hours per month) results in this activity costing somewhere between $12,382.44 and $35,681.69 with a 90% confidence level.

(5.).The last 5 words of that sentence are pretty important. When you are setting your variables for activity time, resource cost, and the number of transactions per month, you want to set the minimum number so that 95% of the values will be above that number and the maximum so that 95% of the values will be below that number.

Now, back to our stakeholder question: When you are speaking with your stakeholders with your Monte Carlo simulation in hand, you can explicitly discuss each assumption and, where the stakeholder has better information than you, immediately incorporate their information into the model and see the impact on the business case.

A Monte Carlo Simulation is an approach whereby you nominate an upper and lower limit for each activity and generate random results (in this case normally distributed)

You’ll note that the Totals (6.) do not equal the sum of the 5th percentile or the 95th percentile.

This is because simply taking the sum of all of the 5th percentile activities does not give you the 5th percentile overall – it gives you the lowest cost for activity 1 plus the lowest cost for activity 2 etc.

The value displayed in the spreadsheet is the 5th percentile of all 7 activities combined into a single transaction.

Doug Hudgeon is a lawyer and vendor management professional who has branched into finance and accounting shared services management.

(5.).The last 5 words of that sentence are pretty important. When you are setting your variables for activity time, resource cost and number of transactions per month, you want to set the minimum number so that 95% of the values will be above that number and the maximum so that 95% of the values will be below that number
. For example, in activity 1 when I said that the activity takes between 1 and 3 minutes what I mean is that 90% of the transactions I observed take between 1 and 3 minutes i.e. 95% of the transactions took 1 minute or more and 95% of the transactions took 3 minutes or less. If I am confident that this is correct for each of the values in the yellow highlighted area of the spreadsheet then I can expect that 90% of the time, my conclusions will be correct.**

(1.) shows each of the activities that will be modeled. In this case, I have set out seven steps involved in manually processing a PO and paying the resulting invoice.

The next three columns (labeled 2, 3, and 4 in the thumbnail image) allow you to enter assumptions against the time taken to perform each activity

(2.), the fully loaded cost of the resource performing the work.

(3.), and the number of transactions per month