Question

A company experiences both variable usage rates and variable lead times for its inventory items. The probability distributions for both usage and lead times are known. A technique the company could use for determining the optimal safety stock levels for an inventory item is:_______

Answer 1

Monte Carlo Simulation Technique

Step-by-step explanation:

A simulation technique experiments with computerised mathematical models to generate optimal levels.

The Monte Carlo simulation is a technique that is widely used across industries to model the components of a project that is usually affected by probabilities and uncertainties. The strength of the Monte Carlo simulation is in its ability to use the stochastic (random sampling of inputs) method to solve a statistical problem through virtualisation.

The use of virtualisation makes it convenient because, in the case of inventory items, for instance, there is no need to physically move these items, virtualisation allows for the input of values for stock (usage and lead times) that can be sampled over and over again until the best input gives the optimal safety stock level.

The Monte Carlo Simulation assists in analyzing complex systems and helps to develop alternative policies to different situations that may occur.

Since the probabilities for both usage and lead times are known, the required input for a mathematical simulation is available, therefore, the optimal safety stock level can be determined.