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Lecture Note 7

This document discusses inventory systems and how they can be simulated. It provides examples of different types of inventories like raw materials, work-in-progress, and finished goods. Key aspects of inventory systems explained include periodic review cycles, lead times, and buffer stocks. The document also presents a simple example of simulating an (M,N) inventory system over multiple periods, tracking beginning inventory, demand, orders, and shortages. The simulation aims to determine average ending inventory and number of days with shortages.

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Vero Abey
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21 views

Lecture Note 7

This document discusses inventory systems and how they can be simulated. It provides examples of different types of inventories like raw materials, work-in-progress, and finished goods. Key aspects of inventory systems explained include periodic review cycles, lead times, and buffer stocks. The document also presents a simple example of simulating an (M,N) inventory system over multiple periods, tracking beginning inventory, demand, orders, and shortages. The simulation aims to determine average ending inventory and number of days with shortages.

Uploaded by

Vero Abey
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Inventory Systems

STAT 32562
Statistical simulation
 Inventory systems are an important class of simulation problems in business organizations.

 Inventories play a crucial role in managerial decision-making.

 Inventories typically constitute a significant portion of a business organization's total capital.

 Correct inventory decision-making is essential to minimize inventory-related costs.

 Inventory decreases due to demand and increases due to replenishment.

 Demand is uncontrollable, but the timing and size of replenishment are controllable.

 The optimal values for replenishment are determined through models to minimize inventory costs.
Examples of inventories

 Raw materials waiting to be used in producing goods.


 Semi-finished goods in process, temporarily stored during the production
process.
 Finished goods awaiting shipment
.
Important terms in an inventory system

 periodic review – at which time the inventory is checked


 lead time – the length of time between the placement and receipt of an order
 buffer – the safety stock to avoid shortages

.
A simple inventory system
The total cost (or total profit) of an inventory system
is the measure of performance. The decision maker can control
the maximum inventory level, M, and the length of the cycle, N.
In an (M, N) inventory system the events that may occur are the
demand for items in the inventory, the review of the inventory
position, and the receipt of an order at the end of each review
period. When the lead time is zero, as in the figure, the last two
events occur simultaneously.
At the end of first review period, an order
quantity Q1 is placed. The lead time (length of time
between the placement and receipt of an order) is zero. In
the second cycle the amount in inventory drops below zero,
indicating shortage. In the figure these units are
backordered; when the order arrives, the demands for the
backordered items are satisfied first.
Example : Simulation of an Order-Up-To-Level Inventory
System
 Consider a situation in which a company sells refrigerators. Their policy is to order up to a level (say
11) using the following relationship:

Order quantity = (Order up to level) - (Ending Inventory) + (Shortage Quantity)

 The number of refrigerators ordered each day is randomly distributed as shown in the Table 1.
Review period is 5 days. Assume that the lead time is 0 and the simulation has been started with the
inventory level at 3 refrigerators and an order of 8 units scheduled to arrive in 2 days’ time.

 Simulate for 25 days (five cycles of simulation)

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Example cont…

Table 1: Random Digit Assignments for Daily Demand

Demand Probability Cumulative Random Digit


Probability Assignment
0 0.10 0.10 01-10
1 0.25 0.35 11-35
2 0.35 0.70 36-70
3 0.21 0.91 71-91
4 0.09 1.00 92-00
Example cont…

Table 2: Random Digit assignments for lead time

Lead Time (days) Probability Cumalative Random-digit


probability assignment
1 0.6 0.6 1-6
2 0.3 0.9 7-9
3 0.1 1.0 0
Example cont…
 Find out the average ending inventory and number of days’ shortage condition exists based on
5 cycles of simulation.

Random digit for daily demand:


24,35,65,81,54,3,87,27,73,70,47,45,48,17,9,42,87,26,36,40,07,63,19,88,94

Random digit for lead time


5,0,3,4,8
Simulation Table for (M,N) Inventory System
Cycle Day Beginning Random Demand Ending Shortage Order Random Days until
Inventory digits for Inventory quantity quantity digits for order
demand lead time arrives
1 1 3 24 1 2 0 - - -
2 2 35 1 1 0 - - -
3 9 65 2 7 0 - - -
4 7 81 3 4 0 - - -
5 4 54 2 2 0 9 5 1
2 1 2 3 0 2 0 - - -
2 11 87 3 8 0 - - -
3 8 27 1 7 0 - - -
4 7 73 3 4 0 - - -
5 4 70 2 2 0 9 0 3
3 1 2 47 2 0 0 - - -
2 0 45 2 0 2 - - -
3 0 48 2 0 4 - - -
4 9 17 1 4 0 - - -
5 4 09 0 4 0 7 3 1
Simulation Table for (M,N) Inventory System cont…
Cycle Day Beginning Random Demand Ending Shortage Order Random Days until
Inventory digits for Inventory quantity quantity digits for order
demand lead time arrives
4 1 4 42 2 2 0 - - -
2 9 87 3 6 0 - - -
3 6 26 1 5 0 - - -
4 5 36 2 3 0 - - -
5 3 40 2 1 0 10 4 1
5 1 1 07 0 1 0 - - -
2 11 63 2 9 0 - - -
3 9 19 1 8 0 - - -
4 8 88 3 5 0 - - -
5 5 94 4 1 0 10 8 2
Example cont…
𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑛𝑑𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
 Average Ending Inventory =
𝑁𝑜 𝑜𝑓 𝑑𝑎𝑦𝑠
88
=
25
= 3.5

 No of day shortage units = 2 days


13

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