A microsimulated model of inventories in interfirm competition

In this paper, the service aspect of inventories is depicted by the use of microsimulation methodology. A computer simulation of a group of enterprises in competition for the business of a group of customers allows us to explore the results for profits of various rules of thumb that enterprises might use in managing their inventories. The model also allows attention to the cost of holding inventories, and to the ways in which production scheduling affects costs. In part the model is consonent with a suggestion by Caplin that both producers and customers be represented in inventory models. On the assumption that firms will gravitate towards methods of handling inventories and production schedules that maximize their profits, the model outlined here can be used to show which methods are likely to prevail, and how this depends on customers’ behaviour and on the structure of the firm’s production costs. The microsimulation model has the virtue that its specification is in terms of individual producers and customers, but macroeconomic results can be produced by runs. This has the potential for allowing parameter fitting by the use of time series data.