Page 31 - DCAP601_SIMULATION_AND_MODELING

Unit 1: Introduction to System Simulation

for instance, should focus their inventory control strategy on anticipating consumer demand Notes
and diminshing loss due to spoilage, whereas a large stable goods retailer like Wal-Mart, Kmart
or Target can afford to make large purchase orders of items, store them in a warehouse and
distribute them internally when receiving volume purchasing discounts.

The Effectiveness of Inventory Control Simulations

The effectiveness of business simulation software is not globally accepted, but it has gained
important credibility by being used in at least three American universities. As per the
Entrepreneur Magazine, simulation software is being used by students under the administration
of professors or assistant professors at the University of Chicago, Seton Hall University and
Michigan State University. In spite of the growing popularity of business simulation software,
its correctness can only be as good as its programming, meaning that programs will be estimated
on a case-by-case basis.

Example: Suppose you work in a retail store as a inventory manager in inventory
mananagement department. Now as a manager it is your responsibility to keep restock certain
item in, the 'store by ordering it from the wholesaler. For this you want to adopt a simple policy
for ordering new supplies: you have to fix that 'When your stock goes down to P items here P
called reorder point, you will order Q more items , here Q called as reorder quantity from the
wholesaler.' If the demand on any day exceeds the amount of inventory on hand, the excess
represents lost sale and loss of goodwill. On the other hand, overstocking implies increased
carrying cost (i.e., cost of storage, insurance, interest, deterioration, etc.). Ordering too frequently
will result in excessive reorder cost. Assume the following conditions:
1. There is a 3-day lag between the order and arrival. The merchandise is ordered at the end
of the day and is received at the beginning of the fourth day. That is, merchandise ordered
on the evening of the ith day is received on the morning of the (i + 3)rd day.
2. For each unit of inventory the carrying cost for each night is ` 0.75.

3. Each unit out of stock when ordered results into a loss of goodwill worth ` 2.00 per unit
plus loss of ` 16.00 net income, that would have resulted in its sale, or a total loss of
` 18.00 per unit. Lost sales are lost forever; they cannot be backordered.
4. Placement of each order costs ` 75.00 regardless of the number of units ordered.
5. The demand in a day can be for any number of units between 0 and 99, each equiprobable.
6. There is never more than one replenishment order outstanding.

7. Initially we have 115 units on hand and no reorder outstanding.
With these conditions in force you have been asked to compare the following five replenishment
policies and seJect the one that has the minimum total cost (i.e., reorder cost + carrying cost + lost
sales cost).
P Q
(reorder pomt) (reorder quantity)
Policy I 125 150
Policy II 125 250

Policy III 150 250
Policy IV 175 250
Policy V 175 300

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