The Inventory Improvement Path Never Ends: Simulation Drives Service Levels and Confidence

While many think that inventory optimization is the end of the improvement process, nothing is further from the truth. Inventory simulation allows responsive adjustment of inventory levels based on your demand forecasts. While simulation represents the end of inventory improvement, you may find remaining at that level is yet another challenge.

Why apply simulation, along with optimization, for inventory planning?

Organizations with complex supply chain networks usually try to strike a balance between too much and insufficient inventory. Despite supply and demand volatility, you must maintain a predetermined inventory level to satisfy customers. Therefore, increasing supply chain inventory level will increase customer service and revenue, but that comes at a cost. While traditional inventory optimization would seem to solve this problem, it lacks an end-to-end overview of the supply chain. Simulation is best suited to analyze complex and significant practical issues that are nearly impossible to solve by mathematical methods.

A simulation model is a set of mathematical and logical concepts that mimics the operation of an existing or proposed system. Simulation provides actionable evidence for decision-making by testing different scenarios or process changes. It applies instinctive simulation software to create a visual prototype of a process. This visual simulation includes timing details, rules, resources, and constraints to accurately reflect real-world functions that depend on inventory optimization.

How do you run a simulation?

When applied to inventory, simulation is a multi-step process:

• First, create a simulation model that establishes a network by identifying customers, distribution centers, manufacturing centers and suppliers.
• Define demand by determining which customers require deliveries of what quantities and at specific times.
• Identify the distribution center (DC) that will satisfy the demand.
• Identify the inventory policies of that DC. For example, can it satisfy the demand in question, or should the DC order from an upper node to meet demand?
• And finally, satisfy the customer and their shipment policies.

The bottom line on simulation for your organization

In the complex supply chains of the real world, simulation identifies the impact of inventory placement policies on your desired service levels. As a result, you can meet anticipated demand with the appropriate amount of inventory. Reaching the optimal level of service allows you to address demand and develop confidence in your inventory planning and optimization abilities.

— By Alex Babu and Milind Kanetkar