Here

we
illust
rate
the
inven
tory
mode
l.
The
simul
ation
descr
ibes
a
reord
er
point
- lot
size
syste
m.
The
inven
tory
holds
a
singl
e
prod
uct
and
is
revie
wed
perio
dicall
y,
week
ly for
the
exam
ple.
The
inven
tory
level
is
decre
ased
by
dema
nd
descr
ibed
as a
rand
om
varia
ble.
Whe
n the
inven
tory
level
reach
es
some
reord
er
point
speci
fied
as a
para
mete
r, an
order
is
place
d.
The
amou
nt of
the
order
is
also
a
para
mete
r of
the
simul
ation
.
After
a
prede
termi
ned
lead
time,
the
reple
nish
ment
is
deliv
ered
and
adde
d to
the
inven
tory.
Duri
ng
the
lead-
time,
the
inven
tory
may
be
exha
usted
and
short
ages
may
occur
. We
assu
me
that
short
ages
are
back
order
ed
and
satisf
ied
when
the
next
order
is
deliv
ered.
An
optio
n
mode
ls the
lost
sales
case.

Ther
e are
costs
assoc
iated
with
reple
nish
ment
,
back
order
s and
inven
tory
level.
We
will
const
ruct
a
simul
ation
of
this
situat
ion.
The
goal
of
the
analy
sis
migh
t be
to
choo
se a
reord
er
point
and
lot
size
that
mini
mize
s the
avera
ge
daily
cost.
Simu
latio
n
does
not
answ
er
that
quest
ion
direc
tly,
but it
can
be
used
to
evalu
ate
alter
nativ
e
choic
es.

The
mode
l is
const
ructe
d by
choo
sing
the
Buil
d
Mod
el
com
mand
and
fillin
g in
the
dialo
g
that
is
prese
nted.
The
mode
l
name
can
conta
in no
space
s or
punct
uatio
n.
The
name
is
used
to
ident
ify
vario
us
range
s on
the
work
sheet
and
cann
ot be
chan
ged
after
the
work
sheet
is
const
ructe
d.
The
defau
lt is
to
back
order
short
ages,
but
the
lost
sales
mode
l is
obtai
ned
if
that
box
is
chec
ked.
The
Cont
rol
Simu
latio
n
box
opera
tes
the
inven
tory
one
perio
d at a
time
and
the
user
make
s
reord
er
decis
ions.
The
initia
l
inven
tory
is
enter
ed as
a
para
mete
r, but
it
may
chan
ged
on
the
work
sheet
. The
lead-
time
affec
ts the
simul
ation
struct
ure
and
once
it is
defin
ed
here
it
cann
ot be
easil
y
chan
ged.

The Worksheet Model

Pressing the OK button on the model dialog, brings forth a second dialog that provides the features of
simulation model that will describe the process. The problem name is fixed as the name given in the M
parameters are set to their proper values. The numbers of columns may be increased to accommodate
features, but they should not be reduced or the program will not be able to build the inventory model.
As the worksheet is constructed, a third dialog will ask for the distribution of the demand. For the exam
the demand is normally distributed random variable with mean 25 per week and a standard deviation o
this dialog, builds the worksheet for the inventory model. All expressions are automatically placed in
variable and parameter definitions are placed on the worksheet. The figure at the left shows the top co
The buttons control the operation of the simulation.
 The parameters of the syste
columns B and C starting at
quantity (C17) and reorder p
decision variables. The initi
and the cost parameters are
The mean and standard dev
are in C32 and C33. All the
changed to represent the sys

The lead-time parameter in

yellow. This indicates that t
not be changed. Changing th
C23will not affect the result
the expressions defining the
to analyze the system with a
create another model.

The seed in F13 is used for

simulation. It controls the se
realized for the simulation.
button changes the seed and
simulation run.

The Change button controls

simulation. An option usefu
observations in the simulati
produces a chart of one of th

At the top of the worksheet are simulation parameters in columns E and I. Results for the simulation r

The simulation model is shown in two parts below. This model has a single random variable for dema
simulated values in column F. The columns necessary for the simulation are columns G through T. Th
for 25 weeks, but only the first five weeks are shown. The interesting result is in column T that shows
other columns are necessary to determine the replenishment orders, backorder amounts and inventory
 The initial conditions are in the rows labeled -3 through 0. The only nonzero value shown is in cell K1
formula that links its value to the initial inventory level in cell C21.

The cells in column V, W and X summarize the results for the 25 simulated weeks.

Row 1
The simulation is implemented by the formulas in table row 1, Row 19 on the worksheet. To create th
simulation, we simply perform the Excel function Fill Down on the simulation form. In this way all th
formulas as row 1, but displaced in reference. A few of the cells are named for the formulas.

• Inv_1_Demand is the range {C31...C33}. This range identifies the normal distribution for the d
the mean and standard deviation.
• Inv_1_r is the number in cell C19. This is the order point. When the inventory position reaches
order must be placed.
 • Inv_1_Q is the number in cell C17. It is the order quantity that is placed at each replenishment

• Inv_1_BO_Cost , Inv_1_Inv_Cost, and Inv_1_RO_Cost are in C25, C27 and C29 respectively
parameters for the inventory system.
Column Quantity Formula
Demand
F =SIM_rand(-F18)
Random
Beginning
G =K18
Inventory
H Delivery =O15
Inventory
I =G19+H19
+ Delivery
J Demand =MAX(ROUND(RV_sim(Inv_1_Demand,-F19),0),0)
Ending
K =I19-J19
Inventory
L On Order =L18-H19+O18
Inventory
M =L19+K19
Position
N Reorder =IF(M19<=Inv_1_r,1,0)
Order
O =IF(N19=1,Inv_1_Q,0)
Quantity
Inv. Less
P =I19-J19
Shortages
Fraction
Q =IF(I19>0,IF(P19>0,0,-P19/ABS(J19)),IF(P19>0,-I19/ABS(J19),1)
Backorder
Back
R =IF(Q19=1, -K19 -P19 /2,-MIN(K19,I19 )*Q19/2)
Orders
S On Hand =IF(Q19=0, K19 +J19 /2,MAX(K19,I19 )*(1-Q19)/2)
T Cost =S19*Inv_1_Inv_Cost + R19*Inv_1_BO_Cost + N19*Inv_1_RO_

We identify several interesting cells in row 0 and row 1.

Cell Description
I18 This cell holds the initial inventory amount. It may be changed, as well as the other
the initial rows of the model.
H19 This cell is interesting because it points several rows higher (earlier) in the simulati
H19 represents the replenishment amount received in day 1 and points to the order q
that occurred four days earlier (in cell M15). We are assuming here that orders are p
the end of the day and are available for sale three whole days later. The amount wil
available for sale during the fourth day following the order.
 In general, expressions may point to any cell that describes the system earlier in tim
necessary to provide one more initial row than the lead-time. Otherwise the express
point to a non-numerical cell.

Expressions may also point to cells in row 1. It is good practice to only point to cell
left in row 1. Otherwise it is possible to create circular references. Excel does not al
It is not reasonable to point to cells lower (later) in the simulation. Circular referenc
almost certainly be created.
N19 This cell holds an "IF" expression, that returns 1 if the inventory position in cell M1
than the reorder point. Thus it indicates if an order will be placed.
O19 This cell holds an expression that places the order quantity into the cell if the previo
N19, is 1.
T19 This cell computes the cost per day based on the cost parameters and the decision to
the backorder amount and the inventory amount. Both of the latter are computed at
the day.
By increasing the sample size, the model can be simulated for a large number of days to determine the
operating the inventory. The figure below shows the results of 1000 observations with a reorder point
quantity of 150. A number of rows and columns are hidden for clarity. Whenever the ending inventory
order is less than 75 and order is placed. The order amount is 150.

At the top of the worksheet, the add-in has added summary information about the simulation run. The
$111 per week. To use the simulation for decision making, we would vary the reorder point and order
the total cost. Since the simulation is dynamic, this can be done without rebuilding the model.
This model has been implemented as the Inventory Game using the Control option. The student observ
end of each week and makes real-time decisions regarding the inventory policy.

Operations Research Models and Methods

Internet
by Paul A. Jensen
Copyright 2004 - All rights reserved