Impact of Frequency of Alignment of Physical and Information System Inventories on Out of Stocks: A Simulation Study

Abstract

Inaccuracy in the information system inventory as compared to the physical inventory may lead to out of stocks. Inaccuracy may occur for many reasons, a principal one being random losses such as theft. One way to reduce this inaccuracy is to adjust the inventory information in the systems at some regular frequency. Such alignments are quite expensive in practice. Thus how often to align the two inventories is the focus of this research. A simulation model is employed to investigate the effect of such loss and the frequent alignment of physical and information system inventories on the stockout (S) and average inventory (I). A term to be called the effective value of stock loss parameter is introduced to signify the effect of frequency of alignment (f) on S. The results derived in this study provide a powerful tool in the hands of an inventory manager. It has been noted that, so far as stockout is concerned, one can effectively reduce the value of stock loss parameter (λ) by any desired value close to zero by selecting a moderate value of frequency f : the effective value of λ gets reduced to ~ λ/f. The accuracy of S and I values on the number of runs in the simulation studies, sensitivity of S and I on various parameters and the nature of stochastic demand distribution, and application of these results with or without deployment of RFID to reduce the loss due to stockout are also discussed. The results under various scenarios indicate that there is a significant gain in reduction of stockout when the alignment is done monthly vs. annually, but it does not add much value beyond a monthly check.

Keywords: Stockout, Out of stocks, RFID, Inventory inaccuracy, Alignment of inventories, Simulation model