Complete the following:
Q- Inventory Control: Monte Carlo Simulation
A bookstore wishes to carry a certain book in stock. Demand is probabilistic and replenishment of stock takes two days (i.e. if the order is placed on June 1, it will be delivered on June 3).
The probabilities of demand are given in the table below:
Daily demand 0 1 2 3 4
Probability 0.05 0.10 0.30 0.45 0.10
Each time an order is placed the store incurs an ordering cost of $1.00 per order and a carrying cost of $0.20 per book per day, which is calculated on the basis of stock at the end of each day. The store manager has two options for his inventory decision.
Option A: Order 5 books when the inventory at the beginning of the day plus outstanding orders is less than 8 books.
Option B: Order 8 books when then inventory at the beginning of the day plus outstanding orders is less than 8 books.
Currently (beginning of the 1st day) the store has a stock of 8 books plus 6 books ordered two days ago and expected top arrive the next day. Using the set of random numbers given below, carry out a 10 cycle Monte Carlo simulation and recommend which option the manager should choose.
Random numbers: 89, 34, 78, 63, 61, 81, 39, 16, 13, 73