Wednesday, September 25, 2013

Balance between shelf space, inventory and transportation: a challenge for retailers.

Retailers face a big challenge trying to achieve excellence in operations. Their limited profit margins make difficult their decision on how to balance transportation, shelf space and inventory costs. If they decide to maximize transportation utilization (minimize the transportation cost), that means that the time between each shipment will be greater, and hence, stores have to increase either their shelf space and inventory (which could represent higher costs) or sacrifice customer service. From class, we know that the main goal of inventory managing is "achieve satisfactory levels of customer service while keeping inventory costs within acceptable bounds". Manager should be able to handle these interactions properly in order to improve the performance of a company.  

This research analyze three operating policies for retailers, under the following conditions:

-A retailer sell several products with random demand
-Trucks travel from warehouse to store and have a lead time
-Trucks have finite capacity, fixed shipping costs (independent of the units shipped)
-Each unit on the shelf represents a cost; there are also costs for holding and back-orders

The operating policies analyzed for dispatching trucks are:

a) Minimum quantity continuous review (Q,S)
   A truck is shipped when demand since the previous shipment reach a fixed fraction of truck capacity. The quantity can be determined using Economic Order Quantity (EOQ) models as we saw in class.

b) Full service periodic review (S,T)
   It reviews the inventory levels every units of time and replenishes the shelves totally with many trucks as needed. it could be the case the a truck carry only one unit.
c) Minimum quantity periodic review (Q,S|T)
   It reviews the inventory levels every units of time, and dispatches trucks is such way that one truck has Q units and the others are full.

You can read more about the research and know the result in the following link:

Once a retailer has adopted the policy suggested by the research, are there other ways to improve the performance? Can a retailer get a better performance by outsourcing? What about new approaches like "Collaborative Physical Logistics" Does they apply to retailers?

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