Improving retailers' service level: incorporating the order line size distribution and preventing unsellable stock levels

This research project has been carried out at the University of Twente, in cooperation with Slimstock, the European market leader in inventory optimization. Currently, there is a considerable potential of keeping useless inventory which will hardly deplete, as the probability of a customer wanting this amount - e.g. three mugs - is very low. These different order line sizes are not accounted for in the standard (R,s,nQ) inventory model we research. This leads to the frequent occurrence of “left-over" inventory being above the reorder level, at which a replenishment order is triggered. Currently (assuming lost sales) in our own model, 75.68\% of the multi-modal SKU do not meet their target fill rate on shop-level, versus 63.58\% of the other type of SKUs. The compound Poisson method performs best for multi-modal order line size SKUs, as with this method the average volume fill rate increases with 8.31\%-point, against 47.12\% more stock on hand, resulting in 84.79\% of the SKUs meeting their target fill rate. The ``Add undershoot"-method performs best for unimodal order line size SKUs, as the average volume fill rate increases with 1.98\%-point, against 13.16\% more stock on hand, resulting in 71.97\% of the SKUs meeting their target fill rate.