Simulation

An Inventory Simulation
Example
Daily demand for refrigerators at Hotpoint
City has a probability distribution
Lead time is not fixed but has a probability
distribution
Customers who arrive and find Hotpoint out
of stock will shop elsewhere and Hotpoint
will lose the sale

These conditions do not meet the
restrictions of inventory models developed
earlier
Simulation Approach
Simulation cannot determine the best
inventory policy
But it can compare policies

Compare the following:
Reordering 10 when inventory reaches 6 or
less
Reordering 12 when inventory reaches 3 or
less
Hotpoint Input Data
Current inventory = 10
Holding costs: $2/refrigerator/day
Order costs: $50 per order
Shortage costs: $30 per occurrence (sale
is lost)
Demand/day Prob Lead Time Prob
0 .08 0 days .05
1 .37 1 day .55
2 .33 2 days .30
3 .17 3 days .10
4 .05
RANDOM NUMBER MAPPINGS
DAILY DEMAND -- Use column 2
0 1 2 3 4
PROB .08 .37 .33 .17 .05
RN 00-07 08-44 45-77 78-94 95-99

LEAD TIME (DAYS) -- Use column 14
0 1 2 3
PROB .05 .55 .30 .10
RN 00-04 05-59 60-89 90-99

SIMULATION OF Q*= 10; r* = 6
COSTS
DAY BI RN DEM EI LOST ORDER RN LT ORD HOLD SHORT
1 10 33 1 9 --- --- --- --- --- 18 ---
2 9 98 4 5 --- YES 24 1 50 10 ---
3 5 26 1 4 --- --- --- 0 --- 8 ---
4 14 91 3 11 --- --- --- --- --- 22 ---
5 11 96 4 7 --- --- --- --- --- 14 ---
6 7 48 2 5 --- YES 63 2 50 10 ---
7 5 82 3 2 --- --- --- 1 --- 4 ---
8 2 27 1 1 --- --- --- 0 --- 2 ---
9 11 96 4 7 --- --- --- --- --- 14 ---
10 7 46 2 5 --- YES 99 3 50 10 ---
150 112 0
Based on this one 10-day simulation average daily
cost = $26.20.
SIMULATION OF Q*= 12; r* = 3
COSTS
DAY BI RN DEM EI LOST ORDER RN LT ORD HOLD SHORT
1 10 33 1 9 --- --- --- --- --- 18 ---
2 9 98 4 5 --- --- --- --- --- 10 ---
3 5 26 1 4 --- --- --- --- --- 8 ---
4 4 91 3 1 --- YES 37 1 50 2 ---
5 1 96 4 0 3 --- --- 0 --- 0 90
6 12 48 2 10 --- --- --- --- --- 20 ---
7 10 82 3 7 --- --- --- --- --- 14 ---
8 7 27 1 6 --- --- --- --- --- 12 ---
9 6 96 4 2 --- YES 84 2 50 4 ---
10 2 46 2 0 --- --- --- --- --- 0 ---
100 88 90
Based on this one 10-day simulation average daily
cost = $27.80.
THE OTHER POLICY APPEARS BETTER!

Review
Simulation of Inventory Models --
Comparing 2 Possible Policies
For Each -- Estimate System Parameters
Using Pseudorandom Numbers
Simulate Cost
Replicate Experiment or Longer Simulation
for better results