Introduction to Stochastic Processes and Simulation

10Simulation of Inventory Management

CONCEPTS DISCUSSED IN THIS CHAPTER.– We start by defining what is needed to perform inventory management simulations, and in particular, a list of parameters to consider.

Then, we will consider a simple simulation example using a spreadsheet and then an ad hoc program.

Finally, we will look at a more general case, comparing several inventory management strategies.

Recommended reading: [PHE 77].

10.1. General provisions

To perform an inventory management simulation, many parameters must be defined:

1. 1) Economic parameters. This is the replenishment cost, the unit cost of holding and the unit cost of shortage.
2. 2) Parameters related to how the company operates. It must be determined whether the sale of items and deliveries takes place five, six or seven days a week. It is important to note that during non-working days, no orders, deliveries or customer requests can be made. However, the holding cost must cover seven days (refrigeration, security, etc.).
3. 3) Parameters for triggering replenishment:

• – timing of replenishment trigger. It could be fixed day. It could be determined by the value of a danger level (the replenishment command is then launched), or, of course, other possibilities. Note that we also consider the time it takes for the supplier to receive the order (fixed or random);
• – quantity to replenish. It can be fixed; it can correspond to the filling of the storage space; it can be equal to the quantity of items sold during the ...