Inventory Management

OPMG 406
Inventory Simulation
Zakaria Yahia, PhD
Associate Professor – Industrial Engineering and Systems Management
School of Business Administration
Nile University
Course Outline and Plan
Week No. Date Lecture
1 23-Feb Opening the Course and Registration
2 02-Mar Course Overview
3 09-Mar Introduction to Inventory Management (Basic Concepts) & ABC Analysis
4 16-Mar One-Item Inventory Models: Economic Order Quantity
5 23-Mar One-Item Inventory Models: Production Order Quantity & Discount Models
6 30-Mar Stochastic Models
7 06-Apr Revision
8 13-Apr Mid-term Exam
9 20-Apr Spring Break
10 27-Apr Stochastic Models
11 04-May Labor Day and Eid El-Fitr Holiday
12 11-May Inventory Simulation using Excel
13 18-May ABC INVENTORY SOFTWARE and Inventory Systems
14 25-May Material Cost/Pricing Policies (Material from Inventory)
15 01-Jun Revision/Project Discussion
16 08-Jun Revision/Project Discussion
17 15-Jun Final Term Exams
Course contents and Weekly plan may be changed or rearranged, stay tuned to Moodle for updates.
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What is Simulation?
• Modeling is abstracting the complexity of the real world.
• Simulation is to imitate or mimic real systems, usually via computer
• Simulation is the process of designing a model of a real system

R AL MODEL of
WORL Real System
(Complexity)
“Real” life “Simulated” life
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The Purpose of Simulation Models
• Simulation model is used to conduct experiments.
• Using the simulation model instead of the real system … usually
much easier, faster, cheaper, safer.
• Make your mistakes on the computer where they don’t count, rather
than for real where they do count.
• Can try wide-ranging ideas with the model.
• Understanding the behavior of the system and/or evaluating various
strategies for the operation of the system.

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Simulation Applications
• System – facility or process, actual or planned
 Manufacturing facility
 Bank operations
 Airport operations (passengers, security, planes, crews,
baggage)
 Hospital facilities (emergency room, operating room, admissions)
 Container terminals operations
 Restaurant operations

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Systems: Manufacturing Facility

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Systems: Banking Operations

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Systems: Airport Operations

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Systems: Hospital Facilities

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Systems: Container Terminals Operations

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Systems: Restaurant Operations

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To Use Simulation
Define the problem Define problem
1

Introduce the important variables associated with the problem Introduce variables
2

Construct a numerical model Construct model

3

Specify values
Set up possible courses of action for testing by specifying values of variables of variables
4

Run the experiment Conduct simulation

5

Consider the results (possibly modifying the model or changing data inputs) Examine results
6

Decide what course of action to take Select best course

7

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Advantages of Simulation
1. Real-world complications can be included that most OM models
cannot permit
2. Can be used to analyze large and complex real-world situations
that cannot be solved by conventional models
3. “Time compression” is possible
4. Allows “what-if” types of questions and different policy decisions can
be quickly evaluated (with almost no cost!)
5. Does not interfere with real-world systems

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Disadvantages of Simulation
1. Can take a long time to develop
2. It is a repetitive approach that may produce different solutions in
repeated runs
3. Managers must generate all of the conditions and constraints for
solutions they want to examine
4. Each simulation model is unique

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Inventory Simulation
1. Begin each simulation day by checking to see if ordered inventory has
arrived. If it has, increase current inventory by the quantity ordered.
2. Generate daily demand using probability distribution and random
numbers.
3. Try to fulfill demand and compute ending inventory. If on-hand is
insufficient to meet demand, satisfy as much as possible and note lost
sales.
4. Determine whether the day's ending inventory has reached the reorder
point. If it has, and there are no outstanding orders, place an order.
Choose lead time using probability distribution and random numbers.

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 Inventory Simulation
Try by yourself! Beginning Inventory = Units DEMAND RANDOM NUMBERS
Order Quantity = Units; Reorder Point = Units
(2) (3) (4) (6) (7) (9) (10)
0 01 through 05
(1)
DAY
UNITS
RECEIVE
BEGIN
INV
RANDOM
NUMBER
(5)
DEMAND
ENDING
INV
LOST
SALES
(8)
ORDER?
RANDOM
NUMBER
LEAD
TIME
1 06 through 15
1 2 16 through 35
2 3 36 through 75
3 4 76 through 90
4 5 91 through 00
5
6 Lead Time RANDOM NUMBERS
7 1 01 through 20
8
2 21 through 70
9
3 71 through 00
10
Totals:

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 Inventory Simulation
First Inventory Simulation. Beginning Inventory = 10 Units DEMAND RANDOM NUMBERS
Order Quantity = 10 Units; Reorder Point = 5 Units 0 01 through 05
(2) (3) (4) (6) (7) (9) (10)
(1) UNITS BEGIN RANDOM (5) ENDING LOST (8) RANDOM LEAD 1 06 through 15
DAY RECEIVE INV NUMBER DEMAND INV SALES ORDER? NUMBER TIME
2 16 through 35
1 10 06
3 36 through 75
2 63
4 76 through 90
3 57
4 94 5 91 through 00
5 52 Lead Time RANDOM NUMBERS
6 69 1 01 through 20
7 32 2 21 through 70
8 30 3 71 through 00
9 48
06, 63, 57, 94, 52, 69, 32, 30, 48, 88
10 88
02, 33, 14, 02, 83, 05, 34, 55, 09, 77
Totals:

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 Inventory Simulation
Simkin Hardware’s First Inventory Simulation. DEMAND RANDOM NUMBERS
Order Quantity = 10 Units; Reorder Point = 5 Units
(2) (3) (4) (6) (7) (9) (10)
0 01 through 05
(1)
DAY
UNITS
RECEIVE
BEGIN
INV
RANDOM
NUMBER
(5)
DEMAND
ENDING
INV
LOST
SALES
(8)
ORDER?
RANDOM
NUMBER
LEAD
TIME
1 06 through 15
1 10 06 1 9 0 No 2 16 through 35
2 0 9 63 3 6 0 No 3 36 through 75
3 0 6 57 3 3 0 Yes 02 1 4 76 through 90
4 0 3 94 5 0 2 No 5 91 through 00
5 10 10 52 3 7 0 No
6 0 7 69 3 4 0 Yes 33 2 Lead Time RANDOM NUMBERS
7 0 4 32 2 2 0 No 1 01 through 20
8 0 2 30 2 0 0 No
2 21 through 70
9 10 10 48 3 7 0 No
3 71 through 00
10 0 7 88 4 3 0 Yes 14 1
Totals: 41 2

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Inventory Simulation

Average 41 total units

ending = = 4.1 units/day
inventory 10 days

Average 2 sales lost

lost = = .2 unit/day
sales 10 days

Average 3 orders
number of = = .3 order/day
orders placed 10 days

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 Summary:
Discussion
&Questions!  What and Why is Simulation?
 Inventory Simulation by Hand!
 Inventory Simulation using Excel!

Inventory Management