Inventory Simulation example

Suppose that we are given a single product 4-echelon network shown as below:

The demand information is available as a one year demand series between 1/1/2016 - 12/30/2016 at the customer level.

The lead times for each site other than the top echelon are defined by transportation times. At the top echelon, the manufacturer, the lead time is defined by production time.

Step1: Run Safety Stock Optimization (SSO)

Safety Stock Optimization must be run before you run Inventory Simulation. In this example, we run Safety Stock Optimization using the “Type 2 (Quantity fill rate)” service definition. You set this on the Safety Stock Optimization: Basic tab in Inventory Optimization options.

Additionally, we will want to use historical demand when running Inventory Simulation, so we also select the checkbox for Populate Site Demand Series on the Demand Analysis tab in Inventory Optimization options.

You can observe the solution in the Inventory Policy Summary table:

Notice that the optimum risk period (i.e. coverage) is provided for the first echelon sites only. Inventory Simulation addresses only sites with a positive coverage value.

Step2: Run Inventory Simulation

Assume that we want to simulate the recommended Safety Stock Optimization solution using the real historical demand, as defined in the demand or orders table. On the Inventory Simulation tab in Inventory Optimization options, select the checkbox for Run Simulation Using Historical Demand.

You can review the simulation results in the Site Product Summary output table. You can see the actual performance of the recommended inventory solution through simulation by observing the achieved service level, average inventory and average backorders. Since “Type 2 (Quantity fill rate)” was selected for Safety Stock Optimization in this example, you can observe the simulated service level results in the Fill Qty Rate column. Similarly, review Average Inventory Units to see the Avg Inventory, and Average Back Order Units to see the Avg Backorders. The tables below show the comparison between the Site Product Summary from Simulation and the Inventory Policy Summary from Safety Stock Optimization:

Site Product Summary

Inventory Policy Summary

The recommended approach for running Inventory Simulation is to use a longer simulation run with a generated demand stream. The longer simulation period helps improve the accuracy of the estimated results from simulation. For example, we now run our model using a 5-year generated demand series (Simulation Length In Months) with a 6-month warm-up period (Warm Up Period In Months).

The results based on these settings are shown below.

Site Product Summary

Inventory Policy Summary