Decision Making Under Uncertainty - Is It Better Off Joining a Partnership or Starting Own Business - An Application of Monte Carlo Simulation in Decision Making
- 1. IS IT BETTER OFF JOINING A PARTNERSHIP OR STARTING OWN BUSINESS? AN APPLICATION OF MONTE CARLO SIMULATION IN DECISION MAKING AUTHOR: ANTHONY MOK DATE: 16 NOV 2023 EMAIL: XXIAOHAO@YAHOO.COM
- 2. 16 November 2023 An Application of Monte Carlo Simulation in Decision Making AGENDA • Brief On Simulation In Decision Making • Project Objective • Context & Opportunity • Strategies For Modelling & Data Analysis • Findings, Conclusions & Recommendations 2
- 3. 16 November 2023 An Application of Monte Carlo Simulation in Decision Making BRIEF ON SIMULATION IN DECISION MAKING Simulation is the process of creating a virtual environment that mimics the behavior of a real-world system. This virtual environment is used to train Machine Learning Models, test new algorithms, and explore the behavior of complex systems. It provides a safe and controlled space to test different options, predict outcomes, and make insight-informed decisions. 3
- 4. 16 November 2023 An Application of Monte Carlo Simulation in Decision Making PROJECT OBJECTIVE WHICH IS BETTER: JOINING A PARTNERSHIP OR STARTING OWN BUSINESS
- 5. 16 November 2023 An Application of Monte Carlo Simulation in Decision Making CONTEXT DANNY Danny, an aviation engineer, works for a major company in Singapore He always wanted to start Door-2- Block Delivery Services using delivery robots Danny researched and estimated costs before starting the business RESEARCH Based on his research, he estimated the following: Costs • Fixed: S$20,000 • Maintenance: S$10/delivery . 5
- 6. 16 November 2023 An Application of Monte Carlo Simulation in Decision Making CONTEXT RESEARCH Profitability Influencers Deliveries: • Singapore: deliveries is normally distributed with mean of 7,000 deliveries and standard deviation of 1,500 deliveries per month 6 RESEARCH Labour Costs: • Labour costs is uniformly distributed between S$7,000 and S$10,000 per month Revenue: • Fixed price based on distance (*refer to next slide) • Demand assumed unaffected by price within the planned range
- 7. 16 November 2023 An Application of Monte Carlo Simulation in Decision Making CONTEXT & OPPORTUNITY * FIXED PRICE BASED ON DISTANCE In a meeting with an online retailer, its Managing Director made an offer of partnership to Danny In this partnership deal: • The Retailer guarantees Danny a salary of at least $$7,500 per month. So, if his earnings in a given month fell below S$7,500, the Retailer will compensate the difference • In exchange, the Retailer receives 70% of all monthly earnings in excess of S$17,500 • In cases of earnings between S$7,500 and S$17,500, all earnings will go to Danny THE OPPORTUNITY 7
- 8. 16 November 2023 An Application of Monte Carlo Simulation in Decision Making STRATEGIES FOR MODELLING & DATA ANALYSIS 1. SIMULATE NUMBER OF DELIVERIES MADE/MONTH Simulated the number of deliveries made per month using RAND() and NORM.INV() in Excel. The following formula was used simulate the Number of Deliveries Made Per Month: “=NORM.INV(B19,$F$10 ,$F$11)”; and “=RAND()” was applied to Cell B19 to create the 1st simulation, thereafter this is reiterated 1,000 times 2. SIMULATE LABOUR COST Simulated Labor costs and ‘Revenue per Delivery’. The following formula “=$J$10+($J$11-$J$10)*D19” was used to simulate the Labor Cost and “=LOOKUP(F19,$R$12:$R$15,$O$12: $O$15)” to simulate the Revenue Per Delivery; “=RAND()” was applied to Cells D19 and F19 to create the 1st simulation, thereafter these are reiterated 1,000 times 3. CALCULATE REVENUE PER DELIVERY Calculated the monthly total revenue, monthly Individual (sole) Profit for Danny, and (monthly profit for Danny in partnership The following formula are used: (i) Monthly Total Revenue = “=C19*G19”, which is Monthly Deliveries X Revenue Per Delivery (ii) Monthly Individual (sole) Profit for Rowan = “=H19-$B$7- ($B$8*C19)-E19”, which is Total Monthly Revenue – NonLabour Fixed Cost – (Maintenance Cost/Delivery X $10/Delivery) – Labour Cost (iii) Monthly Profit for Rowan in Partnership = “=IF(I1917500,(I19-17500)*0.3,I19))” These are to create the 1stsimulation, thereafter these are reiterated 1,000 times. 4. CALCULATE THE MONTHLY TOTAL REVENUE & PROFIT, CALCULATE ESTIMATED AVERAGE PROFIT & VARIANCES Calculated the estimated average individual & average partnership profits and variance of individual & partnership profits by applying “=AVERAGE()” and “=VARP()” to the columns for Monthly Individual (sole) Profit for Danny and Monthly Profit for Danny in Partnership 8
- 9. 16 November 2023 An Application of Monte Carlo Simulation in Decision Making SIMULATIONS* & CALCULATIONS BASED ON STRATEGIES 9 * There is a total of 1,000 simulations in this model. This is just a portion of these.
- 10. 16 November 2023 An Application of Monte Carlo Simulation in Decision Making AVERAGE & MIN/MAX MONTHLY PROFITS CALCULATIONS 9
- 11. 16 November 2023 An Application of Monte Carlo Simulation in Decision Making FINDINGS, CONCLUSIONS & RECOMMENDATIONS* 9 1. The data suggests, through its variability, that the partnership provides better stability to the business during its formative period of development and growth 2. While going alone may yield higher profitability, but this is highly varied (as displayed in the Histogram), and losses seem to be severe 3. Recommendation would be to begin with the partnership to gain market experience and market share 4. Recommendation also includes the conduct of a follow-up simulation later the business becomes more matured. By this time, there is a learning curve with historical data, which is better at informing on costs, revenue and their probabilities. Currently, the data is based on estimates benchmarked from other businesses in the locality of the business park Danny works at * More details on the findings, conclusions and recommendations are found in the project report, which are not released at the request of Danny
- 12. IS IT BETTER OFF JOINING A PARTNERSHIP OR STARTING OWN BUSINESS? AN APPLICATION OF MONTE CARLO SIMULATION IN DECISION MAKING AUTHOR: ANTHONY MOK DATE: 16 NOV 2023 EMAIL: XXIAOHAO@YAHOO.COM