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Week4:ManagingUncertainty
LearningObjectives
Understandprobabilities,importanceandapplicationindailyoperationsandextreme
circumstances.
Understandandapplydescriptivestatistics.
Understanddifferencebetweencontinuousvs.discreterandomvariabledistributions.
Reviewmajordistributions:Uniform(discreteandcontinuous),Poisson,Normaland
Triangle.
Understandthedifferencebetweendiscretevs.continuousdistributions.
Recognizeandapplyprobabilitymassfunctions(pmf),probabilitydensityfunctions
(pdf),andcumulativedensityfunctions(cdf).
SummaryofLesson
Thefirstlessonreviewstwoveryimportanttopicsinsupplychainmanagement:probabilityand
distributions.Probabilityisanoftenreoccurringthemeinsupplychainmanagementduetothe
commonconditionsofuncertainty.Onagivenday,astoremightsell2unitsofaproduct,on
another,50.Toexplorethis,theprobabilityreviewincludesanoverviewofprobabilitytheory,
probabilitylaws,andpropernotation.Summaryordescriptivestatisticsareshownfor
capturingcentraltendencyandthedispersionofadistribution.Finally,weintroducetwo
theoreticaldiscretedistributions:UniformandPoisson.
Thesecondlessonreviewsthreecommoncontinuousdistributions:Uniform,Normal,and
Triangle.Animportantnotethatismostcommonlyinsupplychain,wearedealingwitha
samplepopulation,notthetotalpopulation.Thelessonthengoesthroughthedifference
betweendiscretevs.continuousdistributionsandhowtorecognizethesedifferences.The
remainderofthelessonisadeepdiveintoeachtypeofdistribution,whattheylooklike
graphicallyandwhataretheprobabilitydensityfunctionandcumulativedensityfunctionof
each.
CTL.SC0xSupplyChainAnalytics
KeyConcepts
Probability
Probabilitydefinestheextenttowhichsomethingisprobable,orthelikelihoodofanevent
happening.Itismeasuredbytheratioofthecasetothetotalnumberofcasespossible.
ProbabilityTheory
Mathematicalframeworkforanalyzingrandomeventsorexperiments.
Experimentsareeventswecannotpredictwithcertainty(e.g.,weeklysalesatastore,
flippingacoin,drawingacardfromadeck,etc.).
Eventsareaspecificoutcomefromanexperiment(e.g.,sellinglessthan10itemsina
week,getting3headsinarow,drawingaredcard,etc.)
Notation
P(A)theprobabilitythateventAoccurs
P(A)=complementofP(A)probabilitysomeothereventthatisnotAoccurs.Thisis
alsotheprobabilitythatsomethingotherthanAhappens.
2.IfAandBaremutuallyexclusiveevents,thenP(AorB)=P(AUB)=P(A)+P(B)
3.IfAandBareanytwoevents,then
P(A and B) P A B
P(A | B)
P(B)
P(B)
whereP(AIB)istheconditionalprobabilityofAoccurringgivenBhasalreadyoccurred.
4.IfAandBareindependentevents,then
P(A | B) P(A)
WhereeventsAandBareindependentifknowingthatBoccurreddoesnotinfluencethe
probabilityofAoccurring.
CTL.SC0xSupplyChainAnalytics
Summarystatistics
Descriptiveorsummarystatisticsplayasignificantroleintheinterpretation,presentation,and
organizationofdata.Itcharacterizesasetofdata.Therearemanywaysthatwecan
characterizeadataset,wefocusedontwo:CentralTendencyandDispersionorSpread.
CentralTendency
Thisis,inroughterms,themostlikelyvalueofthedistribution.Itcanbeformallymeasured
inanumberofdifferentwaystoinclude:
Modethespecificvaluethatappearsmostfrequently
Medianthevalueinthemiddleofadistributionthatseparatesthelowerfromthe
higherhalf.Thisisalsocalledthe50thpercentilevalue.
Mean()thesumofvaluesmultipliedbytheirprobability(calledtheexpectedvalue).
Thisisalsothesumofvaluesdividedbythetotalnumberofobservations(calledthe
average).
E[X] x pi xi
n
i1
DispersionorSpread
Thiscapturesthedegreetowhichtheobservationsdifferfromeachother.Themore
commondispersionmetricsare:
Rangethemaximumvalueminustheminimumvalue.
InnerQuartiles75thpercentilevalueminusthe25thpercentilevalue capturesthe
centralhalfoftheentiredistribution.
Variance(2)theexpectedvalueofthesquareddeviationaroundthemean;also
calledtheSecondMomentaroundthemean
2
Var[X] 2 pi xi x pi xi
n
i1
i1
StandardDeviation()thesquarerootofthevariance.Thisputsitinthesameunits
astheexpectedvalueormean.
CoefficientofVariation(CV)theratioofthestandarddeviationoverthemean=/.
Thisisacommoncomparablemetricofdispersionacrossdifferentdistributions.Asa
generalrule:
o 0CV0.75,lowvariability
o 0.75CV1.33,moderatevariability
o CV>1.33,highvariability
PopulationversusSampleVariance
Inpractice,weusuallydonotknowthetruemeanofapopulation.Instead,weneedto
estimatethemeanfromasampleofdatapulledfromthepopulation.Whencalculatingthe
variance,itisimportanttoknowwhetherweareusingallofthedatafromtheentire
populationorjustusingasampleofthepopulationsdata.Inthefirstcasewewanttofind
thepopulationvariancewhileinthesecondcasewewanttofindthesamplevariance.
CTL.SC0xSupplyChainAnalytics
Theonlydifferencesbetweencalculatingthepopulationversusthesamplevariances(and
thustheircorrespondingstandarddeviations)isthatforthepopulationvariance,2,we
dividethesumoftheobservationsbyn(thenumberofobservations)whileforthesample
variance,s2,wedividebyn1.
n
i1
xi
s2
n
i1
xi x
n 1
Notethatthesamplevariancewillbeslightlylargerthanthepopulationvarianceforsmall
valuesofn.Asngetslarger,thisdifferenceessentiallydisappears.Thereasonfortheuse
n1isduetohavingtouseadegreeoffreedomincalculatingtheaverage(xbar)fromthe
samesamplethatweareestimatingthevariance.Itleadstoanunbiasedestimateofthe
populationvariance.Inpractice,youshouldjustusethesamplevarianceandstandard
deviationunlessyouaredealingwithspecificprobabilities,likeflippingacoin.
SpreadsheetFunctionsforSummaryStatistics
Allofthesesummarystatisticscanbecalculatedquiteeasilyinanyspreadsheettool.Thetable
belowsummarizesthefunctionsforthreewidelyusedpackages.
Function
Microsoft Excel
GoogleSheets
LibreOffice>Calc
Minimum
=MIN(array)
=MINA(array)
=MIN(array)
Median
=MEDIAN(array)
=MEDIAN(array)
=MEDIAN(array)
Mode
=MODE(array)
=MODE(array)
=MODE(array)
Mean()
=AVERAGE(array)
=AVERAGE(array)
=AVERAGE(array)
Maximum
=MAX(array)
=MAX(array)
=MAX(array)
Percentile
=PERCENTILE.INC(array,k)
=PERCENTILE(array,
percentile)
=PERCENTILE.INC(array,
alpha)
=VAR.P(array)
=VARP(array)
=VAR.P(array)
SampleVariance(2)
=VAR.S(array)
=VAR(array)
=VAR.S(array)
=STDEV.P(array)
=STDEVP(array)
=STDEV.P(array)
SampleStd Deviation()
=STDEV(array)
=STDEV(array)
=STDEV.S(array)
PopulationVariance(2)
Table1SpreadsheetFunctionsforDescriptiveStatistics
CTL.SC0xSupplyChainAnalytics
ProbabilityDistributions
Probabilitydistributionscaneitherbeempirical(basedonactualdata)ortheoretical(basedon
amathematicalform).Determiningwhichisbestdependsontheobjectiveoftheanalysis.
Empiricaldistributionsfollowpasthistorywhiletheoreticaldistributionsfollowanunderlying
mathematicalfunction.Theoreticaldistributionsdotendtoallowformorerobustmodeling
sincetheempiricaldistributionscanbethoughtofasasamplingofthepopulationdata.The
theoreticaldistributioncanbeseenasbetterdescribingtheassumedpopulationdistribution.
Typically,welookforthetheoreticaldistributionthatbestfitsthedata
Wepresentedfivedistributions.Twoarediscrete(UniformandPoisson)andthreeare
continuous(Uniform,Normal,andTriangle).Eachissummarizedinturn.
DiscreteUniformDistribution~U(a,b)
Finitenumber(N)ofvaluesobservedwithaminimumvalueofaandamaximumvalueofb.
Theprobabilityofeachpossiblevalueis1/NwhereN=ba+1
ProbabilityMassFunction(pmf):
1
for a x b
P X x f (x | a,b) n
0
otherwise
SummaryMetrics
Mean=(a+b)/2
Median=(a+b)/2
ModeN/A(allvaluesareequallylikely)
Variance=((ba+1)21)/12
PoissonDistribution~P()
Discretefrequencydistributionthatgivestheprobabilityofanumberofindependentevents
occurringinafixedtimewheretheparameter =mean=variance.Widelyusedtomodel
arrivals,slowmovinginventory,etc.Notethatthedistributiononlycontainsnonnegative
integersandcancapturenonsymmetricdistributions.Asthenumberofobservationsincrease,
thedistributionbecomesbelllikeandapproximatestheNormalDistribution.
ProbabilityMassFunction(pmf):
x
e
for x 0,1,2,...
P X x f (x | ) x!
0
otherwise
where
e=Eulersnumber~2.71828...
=meanvalue(parameter)
x!=factorialofx,e.g.,3!=321=6and0!=1
CTL.SC0xSupplyChainAnalytics
SummaryMetrics
Mean=
Median ( + 1/3 0.02/)
Mode=
Variance=
Spreadsheet
Function
Prob 1
Prob 2
Microsoft Excel
=POISSON.DIST(x,mean,cumulative)
=POISSON.DIST(0,2.2,0)
=POISSON.DIST(2,2.2,1)
GoogleSheets
=POISSON(x,mean,cumulative)
=POISSON(0,2.2,0)
=POISSON(2,2.2,1)
LibreOffice>Calc
=POISSON(Number;Mean;C)
=POISSON(0;2.2;0)
=POISSON(2;2.2;1)
Table2SpreadsheetFunctionsforPoissondistribution
ContinuousUniformDistribution~U(a,b)
Sometimesalsocalledarectangulardistribution
Xifuniformlydistributedovertherangeatob,orX~U(a,b).
1
if a t b
pdf: f (t | a,b) b a
0
otherwise
cdf:
0 if t a
ta
F(t | a,b)
if a t b
b
1 if t b
SummaryMetrics
Mean=(a+b)/2
Median= (a+b)/2
ModeN/Aallvaluesequallylikely
Variance=(ba)2/12
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NormalDistribution~N(,)
Widelyusedbellshaped,symmetriccontinuousdistributionwithmeanandstandard
deviation.Mostcommonlyuseddistributioninpractice.
SummaryMetrics
Mean=
Median=
Mode=
Variance=2
pdf:
f (x | , )
1
e
(2 )1/2
2
1 x
2
Commondispersionvalues~N(,)
P(Xw/in1around)=0.6826
P(Xw/in2around)=0.9544
P(Xw/in3around)=0.9974
+/1.65around=0.900
+/1.96around=0.950
+/2.81around=0.995
UnitorStandardNormalDistributionZ~N(0,1)
Thetransformationfromany~N(,)totheunitnormaldistribution=Z=(x)/
Zscore(standardscore)givesthenumberofstandarddeviationsawayfromthemean
Allowsforuseofstandardtablesandisusedextensivelyininventorytheoryforsetting
safetystock
Function
cdf ofNormal
Distribution
pdf ofNormal
Distribution
InverseofNormal
cdf
StandardNormalcdf
InverseStandard
Normalcdf
Microsoft Excel
GoogleSheets
LibreOffice>Calc
=NORM.DIST(X,,,1)
=NORMDIST(X,,,1)
=NORM.DIST(X,,,1)
=NORM.DIST(X,,,0)
=NORMDIST(X,,,0)
=NORM.DIST(X,,,,0)
=NORM.INV(Probability,,)
=NORMINV(Probability,,)
=NORM.INV(Probability,,)
=NORM.S.DIST(z,1)
=NORM.S.INV(Probability)
=NORMSDIST(z)
=NORMSINV(Probability)
=NORM.S.DIST(z,1)
=NORM.S.INV(Probability)
Table3SpreadsheetFunctionsforNormalDistribution
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TriangleDistribution~T(a,b,c)
Thisisacontinuousdistributionwithaminimumvalueofa,maximumvalueofb,andamode
ofc.Itisagooddistributiontousewhendealingwithananecdotalorunknowndistribution.It
canalsohandlenonsymmetricdistributionswithlongtails.
2
(b a)
b x
c
Figure1TriangleDistribution
pdf:
2 xa
ba ca
f (x)
2 b x
ba bc
parameters:
xa
axc
cxb
xb
SummaryMetrics
abc
E x
3
1
Var x a 2 b2 c 2 ab ac bc
18
2
for c d b
Px d
b a b c
d b P x d b a b c
for c d b
CTL.SC0xSupplyChainAnalytics
DifferencesbetweenContinuousandDiscreteDistributions
Justlikevariables,distributionscanbeclassifiedintocontinuous(pdf)anddiscrete(pmf)
probabilitydistributions.Whilediscretedistributionshaveaprobabilityforeachoutcome,the
probabilityforaspecificpointinacontinuousdistributionmakesnosenseandiszero.Instead
forcontinuousdistributionswelookfortheprobabilityofarandomvariablefallingwithina
specificinterval.Continuousdistributionsuseafunctionorformulatodescribethedataand
thusinsteadofsumming(aswedidfordiscretedistributions)tofindtheprobability,we
integrateovertheregion.
DiscreteDistributions
ContinuousDistributions
E( X ) i1 pi xi
n
pi (xi )2
2
i1
b
a
t f (t) dt
b
a
(t ) 2 f (t) dt
ProbabilityDensityFunction(pdf)(seeError!Referencesourcenotfound.below)
Thepdfisfunctionofacontinuousvariable.TheprobabilitythatXliesbetweenvaluesaandb
isequaltoareaunderthecurvebetweenaandb.Totalareaunderthecurveequals1,butthe
P(X=t)=0foranyspecificvalueoft.
Figure2ProbabilityDensityFunction
CumulativeDensityFunction(cdf)
F(t)=P(Xt)ortheprobabilitythatXdoesnotexceedt
0F(t)1
F(b)F(a)ifb>aitisincreasing
Simplerules
P(Xt)=F(t)
P(X>t)=1F(t)
P(cXd)=f(d)F(c)
P(X=t)=0
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References
HillierandLieberman(2012)IntroductiontoOperationsResearch,McGrawHill.
Taha,H.A.(2010).OperationsResearch.Anintroduction.9thedition.PearsonPrenticeHall.
Winston(2003)OperationsResearch:ApplicationsandAlgorithms,CengageLearning.Thereare
manydifferentbooksbyWayneWinstontheyareallprettygood.
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