The Role of Computer Simulation in Corporate Management: An Overview

Mazel, B. (1975). The Role of Computer Simulation in Corporate Management: An Overview. IIASA Research Memorandum. IIASA, Laxenburg, Austria: RM-75-071

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Abstract

This memorandum, prepared in support of a general study of integrated industrial systems, focuses on the growing use of computer simulation techniques (models) as a means of increasing the efficiency of management systems in large-scale industries. It first examines three significant generalized models or "business games," describing their important characteristics and evaluating their limitations as predictors of "real world" operations. It appears that models providing information feedback offer particular promise for realistic simulation of large-scale organizations.

Next, the author examines the use of simulation models in industry, noting that the most effective applications have been in the fields of transportation, communication, utilities, banking, and, particularly, manufacturing. An important characteristic of firms successfully using simulation techniques appears to be size: historically most practical applications have been in firms with sales in excess of $500 million, although the advent of relatively low-cost time sharing systems appears to be making the use of corporate modeling attractive to firms with annual sales less than $10 million. Typical costs for design and implementation appear to lie in range of $30,000 to $100,000, while elapsed times for full implementation range from six months to as much as three years.

To date, mathematical, rather than econometric modeling techniques have dominated, and have been used effectively in the fields of finance, marketing, production and inventory control. Although short-term forecasting techniques for projections of sales and revenue are in general use throughout industry, broader applications have suffered from a number of limitations in existing models, among the more significant being a lack of flexibility within the model itself and, in some cases, a lack of commitment to modeling on the part of high-level management. Despite these and other limitations, the high degree of risk and uncertainty characteristic of the current economic environment appears certain to lead to greater use of more complex simulation by managers at all levels.

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