Simulation modelling of an inventory system with fluctuating demand and price

Abstract

Sufficient inventory management is critical in the procurement, storage and usage of product. Thus it is important to find and implement the most suitable inventory system for operating a business at full potential. The aim of the project was to improve the current tyre procurement department of SAA in terms of efficiency and effectiveness by reducing cost and implementing a system that increases visibility in the department. This was achieved through the implementation of an information system and ordering policy model which illustrates a probability to decrease overall cost with 26% annually. This report introduces the project environment and main problem areas encountered at SAA’s Operational Procurement and Fleet Department (OPF). OPF is in charge of managing all vehicles excluding aircraft at SAA. However the department lacks a suitable inventory system for the procurement and storage of various vehicle tyres. Further problems are the uncertainty regarding demand, price and tyre lifetimes which result in ineffective management and inventory policies. The problem environment is also suitable for literature improvement as most research models fail to enclose the totality of the current situation at OPF. An in depth literature review outlines research on the subject of inventory management. Theory concerning inventory management is highlighted and the main types of models applicable to the project are chosen. Various ordering policy models are reviewed and evaluated and gaps in the knowledge base are identified. Simulation modelling as a tool for inventory management is also discussed and models created for this purpose is analysed. The use of information system design in inventory management is investigated and evaluated against the current OPF setting. The literature review concludes with a technique selection where the most applicable Industrial Engineering tools are selected in analysing and solving the applicable problems. Following the review, data analysis was conducted to define the current state of OPF and to find any shortcomings. It was found that the data provided is not sufficient to ensure a perfect solution for OPF. Included in the data analysis are cost calculations, demand and price distributions as well as a full scale business process breakdown. To conclude the data analysis phase, an as-is simulation model was created to analyse the current state of tyre procurement and to set a margin for future system implementation. It was found that 90% of the simulation results correlate with the actual data received from OPF. To address the problem at hand this report focuses on different inventory policy solution alternatives. This includes an EOQ model with backorders, a predetermined fixed order quantity model, a fixed time period model as well as a derivative of a two-period dynamic programming model by Fabian et al (1958). Testing of the models entailed the design of a simulation model that encompasses all of the solution alternatives. The simulation model is validated and verified in depth to give accurate results regarding the solution models. Simulation of these models shows that the Fabian et al (1958) model decreases total overall inventory costs by 46%. Various design criteria was also used in evaluating the models and shows that the Fabian et al (1958) model has an overall design criteria score of 74%, making it the best model out of the ones tested. With this model OPF can save up to R 400 000.00 on tyre procurement annually, however this solution does increase the quantity of shortages. To eliminate the high shortage quantity created by the Fabian model, alterations were made to include the use of a maximum shortage quantity that is allowed per tyre type. This solution decreases the shortage quantity of the original model by 73%. In turn this decreases the time spent on processing and filing orders as well as the risk of shortages occurring during delivery lead times. In total, the altered model decreases the total cost of OPF by 26% or R 319 359 annually. The solution model is implemented with the incorporation of an information system consisting of a database as well as a software program. This information system aims to replace the OPF manual system as well as to increase visibility in the department. In conclusion, the project report encompasses the following: a. problem investigation, b. literature review, c. data analysis, d. solution alternative design, e. model validation, f. simulation model development, g. testing and results, h. information system design and implementation. According to the literature review, space still exists for research involving inventory control whereas the solution development aims to contribute to the knowledge base. Data analysis shows that OPF was in dire need of a new inventory management system which is solved through the development of a mathematical solution model and information system. As shown by the simulation model, OPF is currently spending over R 1 000 000 on tyre procurement annually which include more than a 100 shortages each year. As stated above, the derivative of the Fabian et al (1958) model with maximum shortage level will attempt to reduce the cost by 26% and the shortage quantity by 25%.