SCOM 492:

© 2020 XIAODAN PAN

Supply Chain Simulation

Xiaodan (Shelley) Pan

John Molson School of Business
Concordia University 1
xiaodan.pan@concordia.ca
Agenda
1. Exploring Arena

• Review Periodic Review Inventory System

• Browse through Model 5-4 from low-level blocks

© 2020 XIAODAN PAN

• Browse through Model 5-4 using high-level blocks

2. Class Exercise

• Compare alternative ordering policies

• Search for optimal ordering policies

2
Problem Statement
• A company that sells a single product would like to decide how many
items it should have in inventory for each of the next n time periods
(month, week, day, etc.)

© 2020 XIAODAN PAN

• The times between demands are lID exponential random variables
with a mean of 0.1 time period. The sizes of the demands, D, are IID
random variables, with

3
Law and Kelton (1991)
Problem Statement
• At the beginning of each time period (month, week, day), the
company reviews the inventory level and decides how many items to
order from its supplier.

© 2020 XIAODAN PAN

• When an order is placed, the time required for it to arrive (called the
delivery lag or lead time) is a random variable that is distributed
uniformly between 0.5 and 1 time period.

4
Problem Statement
The company uses a stationary (s, S) policy to decide how much to order,

where I is the inventory level at the beginning of the month.

© 2020 XIAODAN PAN

• The company “takes inventory” to decide whether to place an order with the

supplier at each time period.

• If the inventory level (positive or negative) is less than a constant s (i.e.

s=20), the company orders “up to” another constant S (i.e. S=40).

5
Problem Statement
The company uses a stationary (s, S) policy to decide how much to order,

where I is the inventory level at the beginning of the month.

© 2020 XIAODAN PAN

• When a demand occurs, it is satisfied immediately if the inventory level is at

least as large as the demand.

• If the demand exceeds the inventory level, the excess of demand over

supply is backlogged and satisfied by future deliveries.

• When an order arrives, it is first used to eliminate as much of the backlog 6

as possible; the remainder of the order (if any) is added to the inventory.
Inventory Realization
• Let I(t) be the inventory level at time t [note that I(t) could be
positive, negative, or zero].

• Let I + (t)=max{I(t), 0} be the number of items physically on

© 2020 XIAODAN PAN

hand in the inventory at time t [note that I+ (t)>=0]

• Let I − t =max{ - I(t), 0} be the backlog at time t [note that

I− (t)>=0 as well].

7
Inventory Realization

Backlog

© 2020 XIAODAN PAN

Place an order or not?

Law and Kelton (1991)

8
The time points at which I(t) decreases are the ones at which demand occur.
Inventory Holding Costs
• Inventory holding costs: costs such as warehouse rental,
insurance, taxes, maintenance, and opportunity cost.

• H=$1 per item per time period held in (positive) inventory

© 2020 XIAODAN PAN

• The time-average (per time period) number of items held in
inventory for the n-periods is:

9
Inventory Shortage Costs
• Inventory shortage costs: costs of extra record keeping when a
backlog exists, as well as loss of customers’ goodwill.

• 𝜋=$5 per item per time period in (negative) inventory

© 2020 XIAODAN PAN

• The time-average (per time period) number of items held in
backorder for the n-periods is:

10
Inventory Ordering Costs
• If orders Z items, It incurs a cost of K + i*Z:
• K = $32 is the setup cost

• i = $3 is the incremental cost per item ordered.

© 2020 XIAODAN PAN

• If Z = 0, no cost is incurred.

11
Problem Statement
• Evaluate the average total cost per period

• Average ordering cost per time period

• Average holding cost per time period

© 2020 XIAODAN PAN

• Average shortage cost per time period

• Compare the following ten inventory policies

s 20 20 20 20 40 40 40 60 60 80
S 40 60 80 100 60 80 100 80 100 100

• Search for the optimal inventories policies

12
 Modeling Logic
• The model of the inventory system uses four types of events:

Event Description Event

Type

© 2020 XIAODAN PAN

Arrival of an order from the supplier 1

Demand for the product from a customer 2

End of the simulation after n time periods 3

Inventory evaluation (and possible ordering) 4

at the beginning of a time period
Law and Kelton (1991)
13
Order-Arrival Routine
Assign Inventory Level =

Inventory Level + Order Quantity

© 2020 XIAODAN PAN

14

Law and Kelton (1991)

Demand Routine
Assign Inventory Level =

Inventory Level – Demand Size

© 2020 XIAODAN PAN

15

Law and Kelton (1991)

Inventory-Evaluation Routine

© 2020 XIAODAN PAN

The company “takes
inventory” to decide
whether to place an
order with the supplier
at each time period.

16

Law and Kelton (1991)

Routine to update the continuous-
time statistical accumulators

© 2020 XIAODAN PAN

Dstats:
• Unit Holding Cost
• Unit Shortage Cost

Inventory Shortage Inventory Holding Output:

• Unit Ordering Cost 17
Law and Kelton (1991) • Unit Total Cost
Agenda
1. Exploring Arena

• Review Periodic Review Inventory System

• Browse through Model 5-4 from low-level blocks

© 2020 XIAODAN PAN

• Browse through Model 5-4 using high-level blocks

2. Class Exercise

• Compare alternative ordering policies

• Search for optimal ordering policies

18
Model 5-4: (s, S) Inventory
Simulation

© 2020 XIAODAN PAN

• Demand Against Inventory
• Inventory Evaluation and Possible Ordering with Subsequent Order Arrival 19
• Modules from Elements Panel
Simulation Setup
• Company carries a single discrete item (widgets)

• I(t) = inventory level (an integer) at time t days past

the beginning of the simulation; I(0) = 60

© 2020 XIAODAN PAN

• Run simulation for 120 round-the-clock days

20
Project and Replicate Element
Similar to
Run > Setup

© 2020 XIAODAN PAN

21
Attributes and Entity Element

Define these objects

© 2020 XIAODAN PAN

22
Cost Structure
• Average ordering cost per day
• When an order is placed, incur a fixed cost of $32, plus an incremental
cost of $3 per item ordered
• If no order is placed at the beginning of a day, there’s no ordering cost,

© 2020 XIAODAN PAN

not even the fixed cost
• At end of simulation, divide total of ordering costs by 120
• Average holding cost per day
• Whenever I(t) > 0, incur $1 per day per item on hand
• Average holding cost =
• Average shortage cost per day
• Whenever I(t) < 0, incur $5 per day per item in backlog
23
• Average shortage cost =
Cost Structure (cont’d.)
• During periods when I(t) = 0 there’s neither holding nor shortage cost incurred

• Overall performance measure

= Average total cost per day

= sum of average ordering, holding, and shortage costs per day

© 2020 XIAODAN PAN

• Don’t evaluate inventory at time 120

• We might order and incur an ordering cost then, but order will never arrive

• We’ll fudge this

24
Variable Element
Variables Element
• Inventory Level = I(t)
• Changes during run
• Initialized to 60
• Little s = s = 20
• Big S = S = 40
• Total Ordering Cost accumulator

© 2020 XIAODAN PAN

• Setup Cost = 32
• Incremental Cost = 3
• Unit Holding Cost = 1
• Unit Shortage Cost = 5
• Days to Run = 119.9999 (The Fudge)

25
Expression Element

Expression Element

© 2020 XIAODAN PAN

• Customer interarrival times: EXPO (0.1) day

• Demand size: 1, 2, 3, 4 with prob 1/6, 1/3, 1/3, 1/6

• Delivery lag (lead time): UNIF(0.5, 1.0) day

• Evaluation interval: 1, midnight each day

26
Statistics and Output Element
Request accumulation of integrals for holding, shortage costs

Dstats Element:
• Unit Holding Costs
• Unit Shortage Cost

© 2020 XIAODAN PAN

Outputs Element:
• Unit Ordering Cost
• Unit Total Cost

27
Create Block

Create block for Inventory Evaluator entities

• First Creation at time 0 – evaluate
inventory at start of run

© 2020 XIAODAN PAN

• Interval is Evaluation Interval, defined
as Expression

28
Branch Block
Branch block – somewhat like Decide

module

The company “takes inventory” to decide

whether to place an order with the

supplier at each time period.

© 2020 XIAODAN PAN

True: Order
Else: Dispose 29
Assign Block

Assign Order Quantity Attribute=

© 2020 XIAODAN PAN

Big S – Inventory Level

Increment Total Ordering Cost Variable=

Setup Cost + Incremental Cost * Order Quantity

30
Delay Block

When an order is placed, the time

required for it to arrive (called the

© 2020 XIAODAN PAN

delivery lag or lead time) is a random
variable that is distributed uniformly
between 0.5 and 1 time period.

31
Assign Block

Assign Inventory Level =

Inventory Level + Order Quantity

© 2020 XIAODAN PAN

32
Assign Block Assign Inventory Level =
Inventory Level – Demand Size

• Create block for arrival

• Entity Type is Customer

• Uses Interdemand Time Expression

• Assign block to decrement Inventory Level by a

© 2020 XIAODAN PAN

Demand Size

• Demand Size was defined as an Expression

• Backlogging naturally happens

• Dispose block for customer exit

• If backlogged, is accounted for automatically

and tracking of Inventory Level

33
Agenda
1. Exploring Arena

• Review Periodic Review Inventory System

• Browse through Model 5-4 from low-level blocks

© 2020 XIAODAN PAN

• Browse through Model 5-4 using high-level blocks

2. Class Exercise

• Compare alternative ordering policies

• Search for optimal ordering policies

34
Re-Create Model 5-4: (s, S) Inventory

© 2020 XIAODAN PAN

35
Variable, Attribute, Entity

© 2020 XIAODAN PAN

36
Statistics, Expression

© 2020 XIAODAN PAN

37
 Run Setup

© 2020 XIAODAN PAN

38
Inventory Evaluation and
Possible Ordering

© 2020 XIAODAN PAN

39
Demand Against Inventory

© 2020 XIAODAN PAN

40
Textbook
Simulation with Arena, 6th edition, W. David Kelton, Randall P.
Sadowski, Nancy B. Zupick, McGraw Hill, 2016, ISBN:978-0-07-
340131-7

© 2020 XIAODAN PAN

41
 © 2020 XIAODAN PAN
42