2.

4 STOCHASTIC INVENTORY MODELS

Definition

Stochastic Model is defined as a modelling wherein the state is predicted but not with
full accuracy. Its function is to analyse events, systems and processes using the theory
of probabilities. This kind of modelling is said to be more complicated among other
types. It repsresents the randomness and unptedictability of the events in the real world
as well as their corresponding effects. Due to the ability of this modelling to build
randomness into the simulation, it makes the system more realistic. Stochastic model is
of big help in terms of predicting errors allowing the company who uses this model to
avoid the occurrence of such errors in the future. (Webster) A stochastic model is the
process of setting up projected models that focuses on a single policy of an entire
comoany. It is also a means of setting investment returns based on their estimations.
(Business Dictionary)

Applications

This kind of modelling covers a variety of applications such as in the field of science,
engineering, economics, manufacturing and many more. It is most commonly used in
the field of manufacturing since there are a lot of randomness in terms of inventory
management. (Webster) Stochastic model was used for the in the field of risk
management in global supply chain networks.The stochastic model was used to
analyse the appropriate supply chain risk management wherein the authors designed
an algorithm that could treat the multi - stage global supply chain problem considering
profit maximization and risk minimization. (Goh & Meng, 2007) Stochastic model was
used by researchers to analyse the simulation of the prrsence of occupants within a
building. The model was tested in the occupancy data in private offices and proved its
capabilities in obtaining realistic results. ( Page, Robinson, Morel)(2008) Stochastic
model was also used in the development of energy climate control for weather
predictions and putting into consideration the need for increase of energy efficiency.
( Pariso & Jones, 2010) Another application of stochastic model is in human - machine
interaction used for learning dialog strategies. in this study the researchers was able to
propose a quantitative modelfor dialog systems that will aid in the better understanding
of dialog strategy. ( Levin, Pieraccini & Eckert) (2000) The model was also used for
electric field - induced membrane pores electroporation or reversible pore formation.
( Sugar & Neumann, 1984) The model was also used in determining future prices of oil.
The researchers developed a three - factor model of the term structure of the future
prices of oil that was easily estimated using oil future process data. ( Cortazar &
Schwartz, 2003)