Optimal inventory control with retail pre-packs

Long Gao, Douglas J. Thomas, Michael B. Freimer

Research output: Contribution to journalArticle

9 Scopus citations

Abstract

A pre-pack is a collection of items used in retail distribution. By grouping multiple units of one or more stock keeping units (SKU), distribution and handling costs can be reduced; however, ordering flexibility at the retail outlet is limited. This paper studies an inventory system at a retail level where both pre-packs and individual items (at additional handling cost) can be ordered. For a single-SKU, single-period problem, we show that the optimal policy is to order into a "band" with as few individual units as possible. For the multi-period problem with modular demand, the band policy is still optimal, and the steady-state distribution of the target inventory position possesses a semi-uniform structure, which greatly facilitates the computation of optimal policies and approximations under general demand. For the multi-SKU case, the optimal policy has a generalized band structure. Our numerical results show that pre-pack use is beneficial when facing stable and complementary demands, and substantial handling savings at the distribution center. The cost premium of using simple policies, such as strict base-stock and batch-ordering (pre-packs only), can be substantial for medium parameter ranges.

Original languageEnglish (US)
Pages (from-to)1761-1778
Number of pages18
JournalProduction and Operations Management
Volume23
Issue number10
DOIs
StatePublished - Oct 1 2014

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All Science Journal Classification (ASJC) codes

  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering
  • Management of Technology and Innovation

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