Discrete Event Simulation in Inventory Management

Discrete Event Simulation in Inventory Management

Linh Nguyen Khanh Duong (Auckland University of Technology, New Zealand) and Lincoln C. Wood (University of Otago, New Zealand & Curtin University, Australia)
Copyright: © 2018 |Pages: 10
DOI: 10.4018/978-1-5225-2255-3.ch463
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Abstract

Perishability and substitutability are two key attributes that cannot be ignored in supply chain management. Once produced, perishable products have a finite shelf life. When expired, they are either partially or wholly value-less. The more time that perishable inventory is in storage, the less time it is available for sale to customers. Product substitution is a possibility when considering multiple products. Research indicates that an alternative product is willingly chosen by customers if the preferred one is out of stock. Managers must decide on the replenishment time and replenishment quantity for each item within product subcategory, to maximize expected profits under uncertain demand while minimizing the instances of running out of inventory (i.e., a ‘stock out'). The combination of these factors often requires simulation models to be developed to understand the behavior of the system as the parameters change. Simulation can incorporate stochasticity and complexity while providing detailed output for further analysis and optimization work.
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Background

In general, there are four types of perishable products: food items (e.g., meat, vegetables, dairy products, and beverages), medical/pharmaceuticals (e.g., vaccines, blood, and drugs), plants, and industrial/other (e.g., paint and chemicals). Each type may have several categories, subcategories, and product variants. For example, milk products can be divided into powdered milk or ready-to-drink milk products. Ready-to-drink milk products can be further divided into yogurt or drinks; then, by flavors and sizes.

Key Terms in this Chapter

Product Substitution: A possibility when considering management of multiple products. It is a case that a customer will substitute their preferred product with another with similar characteristics. This is particularly true with ‘commodity’ style products (e.g., milk, where two brands may have very similar characteristics of milk product).

Optimization: A procedure to make a system or a process as efficient as possible. Optimization usually requires mathematical techniques to find the best possible solutions to a problem. In inventory management, optimization often relates to calculating how much inventory to hold (to meet customer demand) while holding as little as possible (to minimize the costs of holding inventory).

Continuous Review System: A system where the stock level of each product is calculated each time a product is moved in or moves out the systems in real-time, triggering an order for more stock when the inventory level falls below a particular re-order point.

Radio Frequency Identification (RFID): A system using radio frequencies to transfer data from tags on items to readers that are connected to other computer systems. This allows automatic identification and tracking products.

Simulation: A method to imitate the operations in real world system over time. The simulation requires a model that closely represents or replicates key characteristics of the physical system.

Perishable Product: A product with short shelf life or one that easily deteriorates. These items include fresh foods, dairy products, and pharmaceuticals. This period of shelf life complicates the inventory management as they must be processed and move through the supply chain for sale to customers before they perish and lose either part of their value or their entire value.

Periodic Review System: A typical inventory system where the inventory level is reviewed at a regular time intervals (e.g., once a week), after that the decision is made as to how much to order to bring the inventory level up to a given amount.

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