Trading Safety Stock for Service Response Time in Inventory Positioning

25 Pages Posted: 6 Apr 2022 Last revised: 16 Aug 2022

See all articles by Hanzhang Qin

Hanzhang Qin

Amazon

David Simchi-Levi

Massachusetts Institute of Technology (MIT) - School of Engineering

Ryan Ferer

Accenture

Jonathan Mays

Accenture

Ken Merriam

Accenture

Megan Forrester

The Home Depot

Alex Hamrick

The Home Depot

Date Written: March 25, 2022

Abstract

We study the inventory placement optimization problem, where demand is sensitive to service response time, under the online retailing setting. The main challenge is to achieve the optimal trade-off between revenue benefits from shorter delivery time and inventory operation costs. To predict the effects of modified demand under service response time variations, we introduce a demand prediction and elasticity model to quantify the sensitivity in demand for particular product categories. We also propose a novel data-driven two-stage stochastic programming approach complementing the demand prediction and elasticity model, which optimally trades safety stock for service response time. We then illustrate the efficiency of our approach through data provided by an e-commerce retailer in North America. Our approach offers supply chain managers a general-purpose decision support tool that optimizes the inventory network to generate recommended stocking levels for stores, distribution centers and warehouses on a daily basis.

Keywords: sales forecast, risk pooling, service quality, supply chain network, online retailing

JEL Classification: C52, C61, P46

Suggested Citation

Qin, Hanzhang and Simchi-Levi, David and Ferer, Ryan and Mays, Jonathan and Merriam, Ken and Forrester, Megan and Hamrick, Alex, Trading Safety Stock for Service Response Time in Inventory Positioning (March 25, 2022). Available at SSRN: https://ssrn.com/abstract=4066119 or http://dx.doi.org/10.2139/ssrn.4066119

David Simchi-Levi

Massachusetts Institute of Technology (MIT) - School of Engineering ( email )

MA
United States

Ryan Ferer

Accenture ( email )

Dublin
Ireland

Jonathan Mays

Accenture ( email )

Dublin
Ireland

Ken Merriam

Accenture ( email )

Dublin
Ireland

Megan Forrester

The Home Depot ( email )

Alex Hamrick

The Home Depot ( email )

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