A Novel Approach with Monte-Carlo Simulation and Hybrid Optimization Approach for Inventory Management with Stochastic Demand

TL;DR

This paper introduces a hybrid optimization method combining Monte Carlo simulation and Gaussian process regression to improve inventory management under stochastic demand, emphasizing ethical considerations and maximizing profit.

Contribution

It presents a novel hybrid approach that efficiently searches for optimal inventory policies considering ethical factors and demand variability.

Findings

(r, Q) approach outperforms (p, Q) in volatile demand, increasing profits by 12.73%

The method effectively manages stochastic demand with quantifiable risk assessment

Provides insights for ethical and responsible supply chain decision-making

Abstract

This study addresses the difficulties associated with inventory management of products with stochastic demand. The objective is to find the optimal combination of order quantity and reorder point that maximizes profit while considering ethical considerations in inventory management. The ethical considerations are risk assessment, social responsibility, environmental sustainability, and customer satisfaction. Monte Carlo simulation (MCS) is used in this study to generate a distribution of demand and lead times for the inventory items, which is then used to estimate the potential profit and risk associated with different inventory policies. This work proposes a hybrid optimization approach combining Gaussian process regression and conditioning function to efficiently search the high-dimensional space of potential continuous review (r, Q) and periodic review (p, Q) values to find the optimal combination that maximizes profit while considering ethical considerations. The findings show that both the (r, Q) and (p, Q) approaches can effectively manage inventory with stochastic demand, but the (r, Q) approach performs better (profits up by 12.73%) when demand is more volatile. The study adds quantifiable risk assessment and sensitivity analysis to these considerations, considering the variation in demand and expected output in profit percentage. The results provide useful information for making ethical and responsible choices in supply chain analytics, boosting efficiency and profits.