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The Monte Carlo Simulation: It is the earliest mathematical Model of real situations in inventory control:
Steps involved in carrying out Monte Carlo simulation are:
- Define the problem and select the measure of effectiveness of the problem thatmight be inventory shortages per period.
- Identify the variables which influence the measure of effectiveness significantly forexample, number of units in inventory.
- Determine the proper cumulative probability distribution of each variable selectedwith the probability on vertical axis and the values of variables on horizontal axis.
- Get a set of random numbers.
- Consider each random number as a decimal value of the cumulative probability distribution with the decimal enter the cumulative distribution plot from the vertical axis. Project this point horizontally, until it intersects cumulative probability distribution curve. Then project the point of intersection down into the vertical axis.
- Then record the value generated into the formula derived from the chosen measure of effectiveness. Solve and record the value. This value is the measure of effectiveness for that simulated value. Repeat above steps until sample is large enough for the satisfaction of the decision maker.
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