BUSINESS SIMULATION MODELLING - Essay Example

Finally, evaluate the results of simulation (Banks, 2005, p.16). Although there are many types of simulation, this project focuses on probabilistic simulation using Monte Carlo method (Torries, 1998, p.59). It is also called computer simulation which is a numerical technique involving the modelling of a stochastic system to predict the systems behavior. The essential charactertistic of Monte Carlo simulation is the chance element (Kalos and Whitlock, 2008, p.116). This approach is used when the process given has a random or chance component.

In this method, a given problem is solved by simulating the original data with random number generators (Pinsky and Karlin, 2010, p.285). The model constructed here is the probability distribution of the variable in question. The distribution can be obtained through direct observation or from past records (Hoekstra and Shachak, 1999, p.180). The objective of the research project is to make simulation of an inventory system. The inventory management simulation is a computer based simulation which generates demand and maintains all necessary records.

Independent demand inventory models follow the classical model of economic order quantity. Inventory holding firms will bear two kinds of costs, ordering and holding costs. Ordering costs include items like labour, transportation, order processing and inspection. It is stated generally as a fixed cost per order and variations can also be included like quantity discounts. Holding costs include items like insurance, obsolescence, warehousing, taxes, management. It is stated as a percentage of unit cost per time period or an amount per item per time period.

The EOQ model can be defined as a classical tradeoff model as with the increase in number of orders per time period, the ordering cost increases and holding cost decreases. The purpose of inventory management is to minimize both ordering and holding costs. When variation is