Wednesday, September 11, 2013
Stochastic analysis: a different approach
The goal of managing inventories is to ensure good quality in customer service at low cost. There are different approaches, and techniques to manage inventories, some of them are based on the deterministic models that are those models in which you always get the same result given the same inputs. Other forecasting techniques are based on stochastic model that are those in which you do not get the same result given the same inputs due to a random component.
Stochastic models seem to be more complicated to implement but they can produce really good results. These articles refers how John Dere, a global manufacturer of agriculture industry used a stochastic model to manage its inventory and achieved a $1B reduction in its inventory cost keeping the same customer service.
The question are:
What characteristics should a company take into account to determine which approach is better to use to manage its inventory?
How a company can determine is a managing inventory model is producing the best possible outcome?