Inventory Optimization using Simulation Approach

Abstract

Inventory creates a significant cost to a firm in the form of the ordering cost, shortage cost, holding cost and also the cost of the goods itself. Managing inventory is always a big challenge for firms in order to balance these operating costs and maintain customer’s service. In this paper, a case study of an electronics manufacturing firm was used to illustrate the use of the Monte Carlo simulation to improve the current inventory system for sensor cable. A simulation model mimicking the current inventory system was developed, and used to study the current system and alternative reorder point policies.  Various reorder points were experimented to determine the reorder policy that results in the lowest average total inventory cost per week. The simulation experiments allow the decision maker to make good purchasing decisions in order to avoid ordering excessive raw materials which lead to higher inventory cost to the company.   Keywords: inventory, optimization, Monte Carlo Simulation