Evaluation of diverse inventory policies using simulation and design of experiment

The importance of inventory management has been evident for a long time since inventories are not only necessary for operations, but they also contribute to customer satisfaction. However, holding inventory comes with costs such as inventory carrying cost and opportunity cost. Therefore, it is vital for a firm to find way to manage its inventory to maximize customer service, minimize total investment, and maintaining operation efficiency. Unfortunately, these three objectives are frequently in conflict with each other. In this paper, the author presents a simulation-based approach to evaluate the impact of continuous and periodic review policies on supply chain performance measures including cost and service level. This simulation model is served as an experimental platform for manager to evaluate diverse inventory policies for different products under different circumstances. For the case study company, continuous and periodic review policies provide relatively the same costs given the same service level. Furthermore, this paper also applies Design of Experiment (DOE) to an inventory simulation model. DOE is used to investigate factors that affect performance including variation in demand, lead time, and review interval, and to analyze the interaction of these factors. All three factors affect total costs but in different magnitude. Interaction between lead time and review interval is also significant. The results of the experimentation enables managers to gain better understanding of different inventory policies and be able to select the configuration that best suit the company´s objective.