Deterministic and Probabilistic Methods
The classic inventory model is generally used either to forecast optimum inventory or to evaluate two or more inventory systems. Two fundamental techniques are generally employed by industries to develop inventory reserve estimates and they are the deterministic and probabilistic methods. The deterministic method concedes a single best estimation of inventory reserves grounded on recognized engineering, geological, and economic information. The probabilistic method employs the known economic, geologica,l and engineering data to produce a collection of approximate stock reserve quantities and their related probabilities. Each inventory reserve categorization gives a signal of the prospect of revival.
The advantage of a probabilistic approach lies in the fact that by using values lying within a bandwidth and modeled by a defined distribution density, the reality can be modeled better than by using deterministic figures.
Deterministic models of inventory control are used to determine the optimal inventory of a single item when demand is mostly largely obscure. Under this model inventory is built up at a constant rate to meet a determined, or accepted, demand. For instance a contract is received in January for 100 model trains and the delivery to be completed by November/holiday shopping. Since the deadline is 10 months so the trains can be produced at a rate of ten per month.
Also stochastic one-item models can be used for inventory control. Such models are used when demand is not known. Stochastic models are more realistic, and thus more relevant, since they regard the cost of shortfalls, the cost of arranging and the cost of stacking away, and attempt to formulate an optimal inventory plan.