Stochastic Models

Otto's Auto Parts Case

Submitted by Jeff Atkins for Atkins & Sons

I. What are Stochastic Models?

There are many unknown and random variables in life. In business, these elements can pose significant risks that can potentially end up hurting a business. Stochastic modeling helps mitigate these harmful risks by making the estimation of the probability of outcomes possible within a specific forecast to predict what conditions might be like in different situations. This takes a lot of the guesswork out of decision-making and provides an individual with a better idea of an expected outcome. It can also equate to the competitive edge that a business can have over another. Business systems commonly use stochastic models to increase productivity, eliminate bottlenecks in queues, predict consumer demand, and maximize profits by appropriately allocating funds where necessary, while reducing losses by minimizing wasteful spending. Through the use of stochastic models, Edmund and Associates will analyze the current practices of your manufacturing plant in Pierre, South Dakota and will recommend strategies on improving the current system in place. You will find a summary of the suggested actions at the close of each section.

II. Tool Crib Staffing

The word Queue comes from the French word cauda meaning tail. Given the definition in its' language of origin, queuing theory is basically the study of wait time in lines. Lines typically begin at the end. Positioning gradually moves closer to the head of the line where an action will occur. In a consumer-based business, a customer will receive service at the head of the line. Once the service has been rendered, the customer is out of the queue. Queuing theory allows for different measurements of the process to be studied such as average wait time for a customer, overall wait time in a queue, and the number of people that would be encountered in line or in the system overall.

After analyzing the information, we...