Building an inventory model for deteriorating items with stochastic demand and lead time using simulation modeling

We consider an inventory system with one warehouse which faces independent Poisson demand. Inventory items are deteriorating at a constant rate and lead times are stochastic. Shortage is allowed and all the unsatisfied demands are backlogged. In addition replenishment is one for one. Our objective is to minimize long-run expected costs. We develop the analytical model for deterministic lead time. Since the stochastic lead time model is complicated especially when lead time has non-exponential distribution and it is difficult to prove convexity of our objective function, we have established simulation model which has no limitation for lead time or any other parameters. We validate our simulation model by comparing simulation and analytical models' results when lead time is deterministic. The results are very close. Furthermore, we try to find near optimal solutions for a number of examples with stochastic lead time by applying optimization module of the applied software.

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