What is monte carlo simulation

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Reference no: EM131439800

Question: O'Brien Chemicals makes three types of products: industrial cleaning, chemical treatment, and some miscellaneous products. Each is sold in 55-gallon drums. The selling price and unit manufacturing cost are shown below:

Manufacturing
Product Type	Selling Price/drum	Cost/drum
Industrial Cleaning
Alkaline Cleaner	$700.00	$275.00
Acid Cleaner	$600.00	$225.00
Neutral Cleaner	$450.00	$150.00
Chemical Treatment
Iron Phosphate	$920.00	$400.00
Zirconium	$1,350.00	$525.00
Zinc Phosphate	$1,400.00	$625.00
Other
Sealant	$850.00	$350.00
Rust Prevention	$600.00	$260.00

Fixed costs are assumed normal with a mean of $5 million and a standard deviation of $20,000. Demands are all assumed to be normally distributed with the following means and standard deviations:

Product Type	Mean Demand	Standard Deviation
Industrial Cleaning
Alkaline Cleaner	5,000	100
Acid Cleaner	2,000	500
Neutral Cleaner	5,000	350
Chemical Treatment
Iron Phosphate	5,500	250
Zirconium	2,800	130
Zinc Phosphate	4,350	300
Other
Sealant	8,000	350
Rust Prevention	4,250	250

The operations manager has to determine the quantity to produce in the face of uncertain demand. One option is to simply produce the mean demand; depending on the actual demand, this could result in a shortage (lost sales) or excess inventory. Two other options are to produce at a level equal to either 75% or 90% of the demand (i.e., find the value so that 75% or 90% of the area under the normal distribution is to the left). Using Monte Carlo simulation, evaluate and compare these three policies and write a report to the operations manager summarizing your finding.

Reference no: EM131439800

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