- Computer simulation; the use of computer software and workstations or sophisticated desktop computers to create outcome scenarios.
- Sensitivity analysis: limited form of computer simulation that focuses on important decision variables.
- Simulations illustrate a broad range of possible outcomes to help managers assess the possible and probable consequences of decision alternatives.
- Computer simulation require allows managers to make precise judgments concerning the desirability of various choices on the basis of highly detailed probability information.
- Computer simulations require probability distribution estimates for a number of variables.
- Full-scale simulations are expensive and time-consuming.
- Limited-scale simulations are used to project outcomes for projects/strategies.
- Instead of using complete probability distributions for each variable included in the problem, results are simulated based on best-guess estimates for each variable.
- Changes in the values of each variable are then considered to see the effects of such changes on project returns.
- Attention is then focused on the variables to which profitability is most sensitive (sensitivity analysis).
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