1 Inventory replenishment in retail: The Efficient Full Service strategy

In this paper we compare two inventory replenishment strategies for retailers and evaluate their effect on service levels, average inventory and the number of order lines. The first inventory replenishment strategy we consider is the Full Service strategy which is currently applied by many retailers and orders at a review period if either a case pack fits onto the shelves or the minimum reorder level is reached. This strategy is compared to an Efficient Full Service strategy where an order is placed only if at areview period the inventory position drops below the minimum reorder level; then as many case packs are ordered as possible taking into account the limited shelf space. This modified strategy will be compared with the current strategy. We will derive approximations for the key performance indicators and use simulation based on empirical data for thousands of SKU’s at multiple stores from a European retailer to quantify the improvement potential of the new strategy and to evaluate our approximations. The results show that, on average, inventory can be reduced with 22 % and the number of handled order lines can be reduced with 17 % when applying the Efficient Full Service strategy, while guaranteeing the same target customer service level. The approximations for the average inventory and the number of order lines perform very well at the store level and perform well at the SKU level. We also show that these approximations can be used as good indicators for the improvement potential of the new replenishment strategy