Inventory Management with Purchase Order Errors and Rework
Harvard Business School
University of Chicago - Booth School of Business
Northwestern University - Department of Industrial Engineering and Management Sciences
August 8, 2013
Chicago Booth Research Paper No. 12-58
In a retail distribution center, the fulfillment of a purchase order (PO) occasionally arrives with errors that the retailer can correct through rework. PO fulfillment errors, which we will refer to as PO errors in brevity henceforth, include “ticket errors,” in which an incorrect stock keeping unit (SKU) number or sale price is put on the tickets attached to some items in a PO. These errors are different from the random yield errors well-known in the literature. Using data from a large retail chain, we determine key properties of these errors, in particular how they vary with order complexity. We define order complexity as having two components, namely average order quantity per SKU and number of SKUs on a PO. In order to study their influence on a retailer’s order policy and inventory system cost, we propose one deterministic and one stochastic (Q,R) inventory model for POs with a single SKU that account for these correctable errors. We study the deterministic inventory model analytically to gain some insights, and conduct numerical experiments to analyze the stochastic model. Our parameters for the numerical experiments are estimated from real retail data. In order to help retailers understand and quantify the cost impact of PO errors and rework, we compare the performance of our adjusted order policy with standard policies that ignore correctable PO errors. In addition, we propose procedures and provide qualitative guidance for a retailer to easily identify SKUs that are more prone to these errors. Retailers can then adjust their inventory models to account for these PO errors and work with their vendors to reduce the error incidence for these high impact SKUs.
Number of Pages in PDF File: 42
Keywords: retail, inventory accuracy, vendor complianceworking papers series
Date posted: December 14, 2011 ; Last revised: August 13, 2013
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