Overview
Stochastic inventory modeling extends the basic inventory equations by adding probability and uncertainty. This is done by modeling some of the variables as having been drawn from a distribution.
The following variables are the primary variables that are modeled as stochastic quantities.
Simulation
One of the best ways to analyze and optimize the statistics of an inventory policy is through the use of Simulations. That is, code is written to simulate the demand and lead time, and an algorithm is written that mimics the inventory policy of the firm. Then, several simulations are run to measure the statistics of that policy.