Computer Simulation

computer simulation

Use of computer software and workstations or sophisticated desktop computers to create outcome scenarios

Another technique designed to assist managers in making decisions under uncertainty is computer simulation. Computer simulation involves the use of computer software and sophisticated desktop computers to create a wide variety of decision outcome scenarios. These simulations illustrate a broad range of possible outcomes to help managers assess the possible and probable consequences of decision alternatives. Using the computer simulation technique, a variety of hypothetical "What if?" questions can be asked and answered on the basis of measurable differences in underlying assumptions. More than just informed conjecture, computer simulation 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, such as investment outlays, unit sales, product prices, input prices, and asset lives. In some instances, full-scale simulations are expensive and time-consuming and therefore restricted to projects such as major plant expansions or new-product decisions. When a firm is deciding whether to accept a major undertaking involving an outlay of millions of dollars, full-scale computer simulations provide valuable insights that are well worth their cost. Somewhat less expensive, limited-scale simulations are used to project outcomes for projects or strategies.

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