Simulation of Involuntary Policies of Inventory Management

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Diploma in Logistics Management (LMGT) – Wuhan OEC  

Simulation of Inventory Policies of Inventory Management Assignment

Group 2L01
Personal work by:
Gao Chaoran

* Introduction:
As the company trading in motor spares wishes to determine the levels of stock it should carry for the items in its range, so we build a model to simulate the real demand process with only know the probability of various demand to maximize the profit. We use the Monte Carlo method to randomly select sample values from a probability distribution to simulate the daily demand pattern in a 25-day run. As carrying cost per unit per day=$2, reordering cost=$35, LT=3 days, beginning stock=200 units, profit per unit=$13, loss of earnings per unsold unit due to shortages=$13, we can use simulations to show detail cost and finally decide the best inventory policy with the highest net profit.

* Model Simulation:
Select a random number range(e.g. 1-100) and then prepare the probability distribution table as given below. Probability Distribution Table(using random number range 1-100) Demand | Probability| Cumulative Probability| Random Number Range| 40| 0.1| 0.1| 1-10|

45| 0.2| 0.3| 11-30|
50| 0.4| 0.7| 31-70|
55| 0.2| 0.9| 71-90|
60| 0.1| 1.0| 91-100|

Execute a simulation run over a period of 25 days with the objective of evaluating the following inventory policies: Inventory Policy 1:
Order 100 units when present inventory plus any outstanding quantities on order fall bellow 60.

Day| Opening Stock| Random Number| Demand Level| Closing Stock| Order Placed| Order In| Shortage| 1| 200| 7| 40| 160| | | |
2| 160| 92| 60| 100| | | |
3| 100| 70| 50| 50| 100|
| | |
4| 50| 41| 50| 0| | | |
5| 0| 1| 40| 0| | | 40|
6| 100| 32| 50| 50| 100| 100| |
7| 50| 22| 45| 5| | | |
8| 5| 25| 45| 0| | | 40|
9| 100| 77| 55| 45| 100| 100| |
10| 45| 99| 60| 0| | | 15|
11| 0| 3| 40| 0| | | 40|
12| 100| 5| 40| 60| | 100| |
13| 60| 50| 50| 10| 100| | |
14| 10| 82| 55| 0| | | 45|
15| 0| 78| 55| 0| | | 55|
16| 100| 10| 40| 60| | 100| |
17| 60| 12| 45| 15| 100| | |
18| 15| 42| 50| 0| | | 35|
19| 0| 9| 40| 0| | | 40|
20| 100| 16| 45| 55| 100| 100| |
21| 55| 23| 45| 10| | | |
22| 10| 45| 50| 0| | | 40|
23| 100| 12| 45| 55| 100| 100| |
24| 55| 50| 50| 5| | | |
25| 5| 80| 55| 0| | | 50|
Total| 1480| | 1200| 680| 7| | 400|

Calculation of costs of this inventory policy:
Total cost = Reorder cost + Holding cost
=(No. of orders placed)*$35 + (Closing stocks)*$2
=7*$35 + 680*$2
=$1605

Gross Profit=(Total demand - Shortages)* Profit per unit
=(1200 – 400)*$13
=$10400

Net Profit = Gross profit – Total cost
=$10400 - $1605
=$8795

Loss of Earning = Shortages * Loss per unsold unit
= 400*$13
=$5200
Inventory Policy 2:
Order 100 units when present inventory plus any outstanding quantities on order fall bellow 100. Day| Opening Stock| Random Number| Demand Level| Closing Stock| Order Placed| Order In| Shortage| 1| 200| 7| 40| 160| | | |

2| 160| 92| 60| 100| | | |
3| 100| 70| 50| 50| 100| | |
4| 50| 41| 50| 0| | | |
5| 0| 1| 40| 0| | | 40|
6| 100| 32| 50| 50| 100| 100| |
7| 50| 22| 45| 5| | | |
8| 5| 25| 45| 0| | | 40|
9| 100| 77| 55| 45| 100| 100| |
10| 45| 99| 60| 0| | | 15|
11| 0| 3| 40| 0| | | 40|
12| 100| 5| 40| 60| 100| 100| |
13| 60| 50| 50| 10| | | |
14| 10| 82| 55| 0| | | 45|
15| 100| 78| 55| 45| 100| 100| |
16| 45| 10| 40| 5| | | |
17| 5| 12| 45| 0| | | 40|
18| 100| 42| 50| 50|...
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