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Monte Carlo Simulation for Sparepart

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 The 11th Asia Pacific Industrial Engineering and Management Systems Conference
The 14th Asia Pacific Regional Meeting of International Foundation for Production Research
Melaka, 7 – 10 December 2010

Monte Carlo Simulation for Sparepart Inventory

I Nyoman Pujawan†1, Niniet Indah Arvitrida2, and Bathamas P. Asihanto

Department of Industrial Engineering
Sepuluh Nopember Institute of Technology
Surabaya, Indonesia
Email: pujawan@ie.its.ac.id1
niniet@ie.its.ac.id2

Abstract - Most inventory models are based on assumptions that demand follows a certain theoretical
distribution (such as Normal or Poisson distribution). For items with relatively fast moving, such an
assumption may hold true. However, for slow moving items such as spare parts, we rarely found that demand
follows such theoretical distribution. Consequently, using standard inventory control models to set inventory
parameters for spare parts would result in either low service level, high inventory level, or both. In this study
we use Monte Carlo simulation to determine inventory control parameters for spare parts. We employ a well
known periodic review base-stock inventory control models where the replenishment decisions are governed
by maximum and minimum inventory levels. The initial solutions were generated using standard inventory
control models. Monte Carlo Simulation is then used to evaluate the parameters against other neighboring
values in terms of inventory cost and service level. We apply the procedure for cabin spare parts in an aircraft
maintenance facility.

Keywords: inventory management, spare parts, simulation.

1. INTRODUCTION academics. One of the reasons why inventory management

Managing spare parts inventory has always been
challenging for a number of (conflicting) reasons. First,
demand for spare parts is often intermittent or lumpy
making it difficult to forecast. Second, the required service
level is high for most spare parts as unavailability would
result in costly consequences such as lengthy facility
breakdown or high costs associated with urgent purchase.
Third, the price for a spare part could be very high making
it less favorable to hold inventories.
For many companies, inventory investment for spare
parts is enormously large. An informal discussion with a
gas exploration company in Indonesia reveals that the spare
parts inventory value in this company is about US$ 47
million. If the annual inventory holding cost is about 30%
then the spare parts cost this company about US$12 million
per year. In addition, the turnover ratio of spare parts is
usually very low (usually between 0.5 and 1 which means
that on average one spare part is consumed every one to
two years.
Despite that managing spare parts inventory is critical
to most companies, studies addressing this issue is fairly
limited, in contrast to inventory for raw materials or
finished goods that have received much attention from
for spare parts received only little attention is because the
demand pattern for spare parts is slow moving, often
intermittent or lumpy (Teunter et al, 2010). As a
consequence, they are difficult to forecast. Lumpy demand
is characterized by many periods with zero demand
(Pujawan & Kingsman, 2003). The inventory control
models that have been developed for fast moving items are
hardly ever appropriate for spare parts.
There are a number of different stream of papers about
spare parts inventory. One of the streams is dealing with
forecasting. Croston (1972) is among the early papers
proposing a method for forecasting demand of spare parts
inventory. This model basically decomposes demand
pattern into two components, i.e., the magnitude of positive
demand and time between demands. This method is further
discussed or developed by other authors such as Regattieri
et al (2005) and Syntetos & Boylan (2005).
The other group of authors deal with optimum setting
of replenishment parameters such as reorder point and
maximum inventory. The most popular method appears to
be the (s, S) or its periodic review version (R, s, S). This
model works as follows. In a review period, when
inventory falls to less than or equal to s then place an order
to bring the inventory level back to S. The determination of

________________________________________
† : Corresponding Author
 The 11th Asia Pacific Industrial Engineering and Management Systems Conference
The 14th Asia Pacific Regional Meeting of International Foundation for Production Research
optimum s and S values has been discussed by many
authors, but most of them have assumed that demand
follows Normal or Poisson distribution.
Due to its demand being intermittentt or lumpy, the
demand distribution for spare parts hardly follows any
theoretical distribution. Consequently, using standard
inventory control models to set inventory parameters for
spare parts would result in either low service level, high
inventory level, or both. In this study we use Monte Carlo
simulation to determine inventory control parameters for
spare parts. By using simulation, we can capture various
demand characteristics including those which do not follow
any theoretical distribution.
2. CASE STUDY
We do the case study in PT. GMF Aeroasia (will be
referred to as GMF in the rest of this paper), an aircraft
maintenance facility, a sister company of Garuda Indonesia.
The GMF manages the maintenance, repair, and overhaul
of aircraft from various airline companies. A critical
activity within the maintenance, repair, and overhaul is the
management of spare parts inventory. With the increasing
variety of aircrafts and the fact that each aircraft consists of
a very large number of components, the management of
spare parts inventory is becoming so critical to achieve an
efficient operations as well as high service level.
In general, there are two major classification of spare
parts related to an aircraft. The first is spare parts that are
required for safety flight such as break, wheel, and many
others. If any of these components does not working well,
the aircraft can not or is not allowed to fly because it will
pose high safety risks. The second classification is related
to cabin materials. If any of the cabin materials is not
functioning well, the aircraft is still able to fly, but it will
compensate the convenience of the passengers.
In this study we will focus on seat materials for B737-
800 as one class of cabin materials. In general the cabin
materials can be classified into six groups, namely
components related to seat (such as hydro-lock, arm rest, in
arm table), in flight entertainment (such as seat electronic
box, video monitor, and harness), lavatory (such as portable
water tank, toilet assembly), lighting, luggage bin and
galley (such as oven, coffee maker, and boiler). The current
situation in GMF shows that many of the cabin materials
are on what they refer to as “hot item list” or HIL, meaning
that those items are not available when needed. For B 737-
800 alone, at the time this observation is made, there were
45 items on HIL status. Among those on the HIL status, the
majority are for seat components. There are in total 94
items that belong to seat components of B737-800.
Like other spare parts in general, we found that the
demand pattern is lumpy for most of the seat materials.
Melaka, 7 – 10 December 2010
According to Regattieri et al. (2005), the demand pattern of
a material is characterized by two attributes, i.e., the
average demand internal (ADI) which is the average time
between occurrence of two successive demands and the
coefficient of variation of the positive demand (CV). Large
values of both ADI and CV indicated high demand
uncertainty and hence, large inventory investment is
required to achieve an acceptable service level. As shown
by figure 1, most items have CV larger than 50% and ADI
more than 1.5, meaning that the degree of lumpiness of
those items is high.
Figure 1 – Demand pattern classification
2.1 The Use of Analytical Models
Most inventory control models have been developed
based on an assumption that demand follows a certain
theoretical distribution. In particular, majority of the
models have assumed that demand follows either normal or
Poisson distribution. In reality, when demand is lumpy,
such an assumption is hardly ever holds true. Consequently,
the use of analytical models for lumpy demand often ends
up with inappropriate inventory parameters. In this study
we have used a periodic base-stock policy called (R, s, S)
where R stands for interval between review periods, s is
reorder point and S is maximum inventory position (Silver
et al, 1998). The model reads as follows. During a review
period, if inventory position falls below s then we have to
order to bring inventory position back to S. Inventory
position is on hand inventory plus on order minus
backorder.
Determination of optimum R, s, and S is not an easy
task. All of these three parameters will affect both
inventory costs and service level. One of the analytical
methods often used for determining those parameters is
called power approximation. However, this approximation
does not always provide good results, especially when
demand is lumpy. We have tried to use the power
approximation to set inventory parameters for a couple of
 The 11th Asia Pacific Industrial Engineering and Management Systems Conference
The 14th Asia Pacific Regional Meeting of International Foundation for Production Research
spare parts. We then simulate the performance of those
parameters to see if they can give good performance in
terms of service level. One of our observations is that this
approximation fails to achieve the intended service level for
almost all situations. As shown in figure 2, the actual
service level is always below the theoretical service level.
Figure 2 - The actual service level (vertical) is always
lower than the intended service level (horizontal)
2.2 The Use of Monte Carlo Simulation
We have used the Monte Carlo simulation to evaluate
the performance of the parameters from power
approximation. As we believe that those parameters are
rarely the best ones, we also evaluate other set of
parameters close to those recommended by the power
approximation. Since the demand for parameters is mostly
slow moving, the choice of s and S values is relatively
limited, making the simulation quite effective for finding
the best set of parameters.
The simulation procedure can be summarized as
follows. First, based on historical data of 28 months, we
model the empirical demand distribution. As an illustration,
we will use item PN102-504 (we have made an arbitrary
part number, different from the actual number used by the
company). The historical data shows that 71% of months
has no demand for this item. About 3.5% has a demand of 1
or 2, 10.7% has a demand of 3 or 4 and the rest is 5 or 6. To
generate the demand, a uniform (0,1) random number is use.
If random number falls between 0 and 0.710 then demand
is set to be zero. If random number is between 0.710 and
0.745 then demand is either 1 or 2 with an equal probability,
and so on.
Let D(t) = demand in period t, obtained through the
above procedure. We then do the following steps:
• Update inventory: I(t) = I(t-1) + R(t) – D(t) –B(t)
• Update on-hand inventory: O(t) = max (0, I(t))
• Update backlog: B(t) = max (0, -I(t))
• Calculate inventory position: IP(t) = I(t) + O(t)
• Determine ordering decision: If IP(t) < s, Q = S –
IP(t), otherwise Q = 0
Melaka, 7 – 10 December 2010
• Update on order quantity: O(t) = O(t-1)+Q(t)-R(t)
• Determine order receipt schedule: R(t+L) = Q
Where I(t)is inventory at the end of period t, O(t) is on
hand inventory, B(t) is backlog in period t, R(t) is schedule
receive in period t, Q(t) is order quantity in period t, and L
lead time.
As an illustration, we will use one part called PN30-
802 (we have made an arbitrary part number, different from
the actual number used by the company). The baseline
parameters obtained from the power approximation is s = 5
and S = 6, with an intention to achieve a service level of
95%. We then do a parameter search by lowering and
increasing both s and S values around their baselines. The
result is shown in table 1.
Assuming that service level 95% is required, then we
have to exclude those alternatives with actual service
level below 95%. Figure 3 shows that the remaining
candidates are those at the right side of the vertical dotted
line. Among the remaining candidates, we then have to
again exclude those that are not at the efficient frontier.
Efficient frontier can simply be defined as a curve
connecting the most efficient candidates. The most efficient
candidates can be visually seen as those at the outer side of
group. By looking at figure 3, there appears to be only 4
candidates are remaining. Now, the decision maker has to
make a choice among the 4 remaining candidates. Since the
service level for each part should be dependent on part
criticality, choosing a solution with a service level much
higher than the initial target would be inappropriate. Thus,
as long as the service level target has been set carefully
with consideration of item criticality then the simple rule of
thumb is to choose a candidate with lowest cost in the
efficient frontier.
Efficient frontier
Figure 3 - Service level (horizontal) and cost (vertical) for
each candidate
 The 11th Asia Pacific Industrial Engineering and Management Systems Conference
The 14th Asia Pacific Regional Meeting of International Foundation for Production Research
3. DEVELOPMENT OF DECISION SUPPORT
SYSTEM
A spreadsheet-based decision support system (DSS)
has been developed to assist decision maker in performing
the above procedure until the best candidate is obtained. We
have tested the DSS with the data of 20 seat components.
The tests show that the DSS has worked well and practical
enough to use.
4. CONCLUDING REMARKS
In this study, a decision support system has been
developed to obtain the best replenishment policy for spare
parts. As the demand pattern for most spare parts typically
is lumpy, it is hardly ever true that it follows any theoretical
distribution such as Normal or Poisson. The analytical
models for inventory policy is normally assumed that the
demand follows Normal, Poisson, or any other standard
distribution. This has lead this study to use simulation to
obtain the best inventory parameters. We use a periodic
review (R, s, S) inventory model and the parameter s (the
reorder point) and S (the maximum stock) is obtained
through simulation. The results suggest that the values of s
and S obtained by simulation are always better than those
from analytical models in terms of costs and service level.
REFERENCES
Archibald, B. C., dan Silver, E. A. (1978). (s, S)
policies under continuous review and discrete compound
Poisson demand. Management Science 24, pp. 899 – 904.
Babai, M. Z., Syntetos, A. A., dan Teunter, R. H.
(2010). On the empirical performance of (T, s, S) heuristics.
European Journal of Operational Research 202, pp. 466 –
472.
Croston, J. D. (1972). Forecasting and stock control
for intermittent demand. Operational Research Quarterly
23, pp. 289 – 303.
Huiskonen, J. (2001). Maintenance spare parts
logistics: Special characteristics and strategic choices.
International Journal of Production Economics 71, pp. 125
– 133.
Nenes, G., Panagiotidou, S., dan Tagaras, G. (2010).
Inventory Management of multiple items with irregular
Melaka, 7 – 10 December 2010
demand: A case study. European Journal of Operational
Research 205, pp. 313 – 324.
Pujawan, I N. dan Kingsman, B. G. (2003). Properties
of lot sizing rules under lumpy demand. International
Journal of Production Economics 88, pp. 295-307.
Regattieri, A., Gamberi, M., Gamberini, R., dan
Manzini, R. (2005). Managing lumpy demand for aircraft
spare parts. Journal of Air Transport Management 11, pp.
426 – 431.
Rustenburg, W. D., van Houtum, G. J., dan Zijm, W.
H. M. (2001). Spare parts management at complex
technology-based organizations: An agenda for research.
International Journal of Production Economics 71, pp. 177
– 193.
Syntetos, A. A., dan Boylan, J. E. (2005). The
accuracy of intermitten demand estimates. International
Journal of Forecasting 21, pp. 303 – 314.
Teunter, R. H., Syntetos, A. A., dan Babai, M. Z.
(2010). Determining order-up-to levels under periodic
review for compound binomial (intermittent) demand.
European Journal of Operational Research 203, pp. 619 –
624.
AUTHOR BIOGRAPHIES
Nyoman Pujawan is professor of supply chain engineering
at the Department of Industrial Engineering, Sepuluh
Nopember Institute of Technology (ITS), Surabaya -
Indonesia. He received his PhD from Lancaster University,
UK. He has published papers in such journals as European
Journal of Operational Research, International Journal of
Production Economics, Production Planning and Control,
Business Process Management Journal, and many others.
He is the Editor-in-Chief of Operations and Supply Chain
Management: An International Journal. He can be reached
at< pujawan@ie.its.ac.id>.
Niniet Indah Arvitrida is a Lecturer at the Department of
Industrial Engineering, Sepuluh Nopember Institute of
Technology, Surabaya - Indonesia. She received her
bachelor and master degrees, both in Industrial Engineering,
from ITS.
Bathamas P. Asihanto graduated from the Department of
Industrial Engineering, Sepuluh Nopember Institute of
Technology, Surabaya - Indonesia in 2010.
 The 11th Asia Pacific Industrial Engineering and Management Systems Conference
The 14th Asia Pacific Regional Meeting of International Foundation for Production Research
Melaka, 7 – 10 December 2010

Table 1 – Simulation results for different parameters s and S for item PN30-802.

INPUT RESULTS
Experiment
Theoretical Actual Holding Order Shortage Total
No. S s
SL SL Cost Cost Cost Cost
1 8 92,50% 6,00 88,50% $138.342 $6.668 $68.376 $213.386
2 9 92,50% 6,00 91,74% $162.522 $6.337 $45.562 $214.421
3 10 92,50% 6,00 93,20% $178.029 $5.368 $37.686 $221.083
4 11 92,50% 6,00 94,47% $193.524 $4.634 $32.450 $230.608
5 12 92,50% 6,00 94,64% $204.378 $3.892 $32.780 $241.050
6 9 95,00% 7,00 91,97% $164.961 $6.668 $43.010 $214.639
7 10 95,00% 7,00 94,50% $190.116 $6.337 $27.346 $223.799
8 11 95,00% 7,00 95,68% $206.061 $5.368 $22.682 $234.111
9 12 95,00% 7,00 96,42% $221.937 $4.634 $20.240 $246.811
10 13 95,00% 7,00 96,02% $232.845 $3.892 $20.966 $257.703
11 10 97,50% 8,00 94,80% $192.624 $6.668 $25.300 $224.592
12 11 97,50% 8,00 96,82% $218.538 $6.337 $15.202 $240.077
13 12 97,50% 8,00 97,58% $234.840 $5.368 $13.156 $253.364
14 13 97,50% 8,00 97,53% $250.938 $4.634 $12.342 $267.914
15 14 97,50% 8,00 97,49% $261.726 $3.892 $12.188 $277.806
16 11 99,00% 9,00 97,07% $221.139 $6.668 $13.838 $241.645
17 12 99,00% 9,00 98,51% $247.659 $6.337 $8.184 $262.180
18 13 99,00% 9,00 98,35% $264.189 $5.368 $7.810 $277.367
19 14 99,00% 9,00 98,49% $280.272 $4.634 $6.886 $291.792
20 15 99,00% 9,00 98,53% $291.048 $3.892 $6.644 $301.584

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