Sunday, September 14, 2014

Putting Monte Carlo Simulation to Use in Inventory Management

After completing the readings for this week, which delved into inventory management and gave us an example of how industry giant Walmart handles this complex issue, I wanted to read more about how small and mid-sized companies take on the challenges of managing inventory.

I found a variety of articles and videos (such as the one below) detailing the ease of using fairly basic techniques in Microsoft Excel to track and manage inventory, and indicating that this is a sufficient solution for small companies.

 [1]

However, I also came across strong critics of using Excel for this purpose, who listed high potential for data entry errors, limited user access, lack of real-time inventory data, and difficulty in accessing and analyzing historical data trends among its faults. [2] These drawbacks are substantial, as mistakes in inventory management are costly, and an inventory management system with these deficiencies is surely not the best option.  What, then, are companies who have outgrown basic Excel but aren't large enough to budget for expensive, complex systems to do?

Enter Right Sized Inventory, a startup that is using Monte Carlo simulations to determine the appropriate inventory level to match the service level at which a company wishes to operate. [3]  This management science technique runs a simulation 10,000 times to determine inventory levels, and in trial runs with medical device and construction companies, the startup has identified examples of 20% inventory shortages and inventory excesses of $2.2 million.

The founder of this company, who has an extensive supply chain background and has been preparing to take his product to market since 2013 and was, as of last month, ready to find customers, believes he has found a niche in the inventory management tools market. Could this startup's management science technique provide a viable solution for companies that fall between the currently available inventory management tools?  While intended to target mid-sized companies, could this tool be applicable to larger companies?  It will be interesting to see how successful this company is as it begins to expand its customer base.   

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Sources:
[1] https://www.youtube.com/watch?v=5OrVeaERc7E
[2] http://www.waspbarcode.com/buzz/4-reasons-excel-inventory-management-doesnt-work/
[3] http://www.bizjournals.com/albuquerque/news/2014/08/19/startup-using-gambling-techniques-for-inventory.html?page=all

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