A Finite Horizon Inventory Model: An Operational Framework

Abstract

We present a simulation based decision support system to decide the inventory ordering policy in the context of a single commodity, multi pack, and finite horizon situation. The multiple objectives include (a) Minimizing the end of the season inventory, (b) Maximizing the operating profit, (c) Minimizing the peak working capital requirements during the season. Stochastic demand and positive lead time add to the complexity of the problem context. In addition multiple partners in the supply chain with distinct and conflicting set of objectives necessitate the need for a formal approach. The motivation for this model is based on a real life situation. The model addresses the decision choices faced by the distributor in a specific logistics chain. In this chain, a typical distributor has to balance between the stochastic nature of the demand and the attractive nature of financial incentives (order quantity based) proposed by the manufacturer. The problem can be formulated as a multi-period dynamic programming problem with stochastic demand with an objective to optimize the expected operating profit, subject to specific constraints on working capital requirement, service level, order fill rate and end of the season inventory. Such a formulation is hard to solve and does not lend itself to analyze several ordering policies. Based on simulation experiments, we propose an ordering policy which optimizes the overall objectives of supply chain partners and hence demonstrated the possibility of jointly managing the uncertain demand by supply chain partners. The model is simple and easy to use. It is implemented by using spreadsheet. It provides adequate flexibility to conduct what-if analysis. The model has a potential to be useful in a wide range of situations.