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SIMULATION | FREE ABM NOTES | CAIIB STUDY MATERIAL 2022

FREE ABM NOTES ON UNIT: SIMULATION | CAIIB STUDY MATERIAL 2022

These ABM notes are on the Simulation for the CAIIB Exams 2022 which will help you clear CAIIB 2022.

Candidates who are preparing for the Advanced Bank Management i.e ABM, Paper-1 of CAIIB 2022 Exams will find this article on Simulation from the Module-B of ABM paper very helpful to understand. The notes will make the understanding of CAIIB candidates very easy on the concept of Simulation. So, these are must-read for ABM preparation for the June 2022 papers.

WHAT DO YOU MEAN BY SIMULATION?

A simulation is something which represents something else which may or may not be the real thing. The term could be understood from the fact that it is usually performed as practice for real life situations, such as a flight simulation to train pilots. The term can also be used to describe something that is entirely fake. 

Suitability: Simulation is suitable for situations where due to the size or complexity of the problem make it difficult or impossible to use the other techniques to test the real thing. 

For example: The problem of queuing has been extensively studied through simulation. There are some other types of inventory problems, layout and maintenance problems which can also be studied with the help of simulation. Simulation can be used with traditional statistical & management techniques.

Simulation has been very much useful in training managers & workers to let them understand how the real system operates as well as in demonstrating the effects of changes in system variables & real-time control. 

This technique has been extensively used to teach driving so that the person who is learning faces real road situations such as traffic jams & other problems during this learning process. It helps them learn how to avoid serious accidents.

In the banking or finance sector, simulation has been commonly used in the areas of forex, investment & risk management areas.

APPLICATION OF SIMULATION METHODS:

The technique of simulation has been successfully used to solve the following problems:

  • To control queuing in Air Traffics
  • To schedule Aircraft maintenance
  • To schedule Assembly line
  • To design Inventory reorders
  • For Railroad operations
  • Facility layout
  • Risk modeling in the finance area.
  • Stock market
  • Foreign exchange market

Example of Simulation:

Retail owner wants to evaluate her ordering policy to find a better method for deciding the quantity of order that she needs to place.

As per the current policy, today’s order = previous day’s demand.

Past Data: She places orders at the end of the day as per the current day’s demand & gets the delivery of the order by the next morning. From the past experience, she has a such that the demand for soup ranges between 30 to 80 litres/day.

New Rule: She also has the record of the relative frequency of the quantity which is demanded during the last 10 days & now she wants to find the new rule of ordering = Mean of Qty sold in the last 10 days.

She has maintained the data related to sales as per the following table. The table shows the demand & relative frequency in 10 days i.e how many times demand has occurred.

Demand per day in Litres Relative Frequency
35 1/ 10 i.e. only 1 day, out of 10 days, demand of 35 litres occurred
45 3/ 10 i.e. only 3 days, out of 10 days, demand of 45 litres occurred
55 2/ 10 i.e. only 2 days, out of 10 days, demand of 55 litres occurred
65 3/ 10 i.e. only 3 days, out of 10 days, demand of 65 litres occurred
75 1/ 10 i.e. only 1 day, out of 10 days, demand of 75 litres occured

 

She settles for the ordering rule:

[(35 × 0.10) + (45 × 0.30) + (55 × 0.20) + (65 × 0.30) + (75 × 0.10)] = 55.00 litres.

So, she has got 2 rules (Representing mathematically): 

  1. Old rule = quantity demanded on previous day is equal to D (n – 1)
  2. New rule = Mean (Average) of the past 10 days = 55

COMPARISON OF ORDERS IN TERMS OF PROFITS 

The calculation would be:

Profit ‘P’ = (Quantity Sold × selling price (p)) – (Quantity Ordered × cost price (c)).

Assuming that the unsold soup containers are thrown away because of their perishability, now for simulation, she will have to develop a method for demand generation. 

Let us use the probability distribution of demand & random no’s to generate a demand for the next 20 days for her.

We will arrange the chance process to generate occurrences in the system as per following table:

Demand Per

Day

Relative

Frequency

Probability Random

Number

Interval (RNI)

35.00 1/10 0.10 0 to 9
45.00 3/10 0.30 10 to 39
55.00 2/10 0.20 40 to 59
65.00 3/10 0.30 60 to 89
75.00 1/10 0.10 90 to 99

 

With the help of table and Random numbers, we will develop the demand for 20 days, by following The below steps:

  1. Choose any random number
  2. Find the random number interval which is associated with a random number chosen
  3. You will get the demand corresponding to that random number interval.
  4. Assume D = 55 litres at Day 0
  5. Quantity sold = lesson of the demand (D) or quantity ordered (Q1)
  6. Profit = (quantity sold X selling price) – (quantity ordered X cost price); while the cost = Rs.12/ltr & Selling price = Rs. 16/ltr
  7. Follow all the above steps for 20 days to create simulation.
Day RN (Random No.) D (Demand related to respective RNI) Q1 (quantity ordered based on demand of previous day) S1 (quantity sold under old method) (lesser of D & Q1) PR-1 (rupees) profit under old method (16 x S1)- (12 x Q1) Q2 (quantity ordered) (mean of quantity sold in last 10 days)
–    55.00  –    –    –    –    –   
6.00  35.00  55.00  35.00  (100.00) 55.00 
39.00  45.00  35.00  35.00  140.00  55.00 
89.00  65.00  45.00  45.00  180.00  55.00 
61.00  65.00  65.00  65.00  260.00  55.00 
99.00  75.00  65.00  65.00  260.00  55.00 
95.00  75.00  75.00  75.00  300.00  55.00 
55.00  55.00  75.00  55.00  (20.00) 55.00 
35.00  45.00  55.00  45.00  60.00  55.00 
57.00  55.00  45.00  45.00  180.00  55.00 
10  59.00  55.00  55.00  55.00  220.00  55.00 
11  30.00  45.00  55.00  45.00  60.00  55.00 
12  81.00  65.00  45.00  45.00  180.00  55.00 
13  2.00  35.00  65.00  35.00  (220.00) 55.00 
14  18.00  45.00  35.00  35.00  140.00  55.00 
15  87.00  65.00  45.00  45.00  180.00  55.00 
16  68.00  65.00  65.00  65.00  260.00  55.00 
17  28.00  45.00  65.00  45.00  (60.00) 55.00 
18  44.00  55.00  45.00  45.00  180.00  55.00 
19  80.00  65.00  55.00  55.00  220.00  55.00 
20  84.00  65.00  65.00  65.00  260.00  55.00 
Total  1,120.00  1,110.00  1,000.00  2,680.00  1,100.00 
Average  56.00  55.50  50.00  134.00  55.00 

 

We can see that after the simulation is:

As per old method: the average demand = 56 litres, Average order = 55.50 litres while average sales = 50 litres

As per new method: the average demand = 55.50 litres, Average order = 55.00 litres while average sales = 55 litres.

This way, it can be seen that profitability will improve under the new method.

Thus, we hope that you will have easily understood the meaning of simulation & how it is being used in the banking industry or finance world for decision making purposes. This is one of the reasons for why – the concept of simulation has been incorporated in the ABM i.e advance bank management paper of CAIIB Exam 2022.

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