Using simulation to explore the impact of inventory policies on supply chain performance

To survive in today competitive environment, companies need to improve customer service while reducing costs. One way to address this challenge is to effectively and efficiently managing inventory. Companies carry inventory to ensure the level of customer service and avoid lost sales. However, holding inventory comes with costs such as inventory carrying cost and opportunity cost. There are several inventory policies proposed in the literature which aim to manage the difficult trade-off between minimizing the costs of holding inventory and satisfying customer demand. Unfortunately, these policies tend to be generic and work well under assumptions. Some assumptions may be contradicted to real-world practice, for example, stable and deterministic customer demand. In addition, certain policy that works well in one industry may not be appropriate for other industry under different environment. As a result, there is a need to develop a simulation model to determine a suitable inventory policy and explore the effect of inventory policy on supply chain performance, including cost and service level (fill rate) for a particular company or supply chain. In this paper, a case study of a beverage distribution center was used to illustrate the use of simulation to identify the most suitable inventory policy. Simulation model and simulation optimization can serve as a guiding tool to develop appropriate inventory policy. Furthermore, experimenting with the simulation model can also help manager to understand the effect of change in environment/condition on the effectiveness of the inventory policy.