Optimizing retailer inventory levels

Abstract

Background &
Problem:
In previous years, there has been low focus on inventory control.
Due to high margins on the products, a high inventory level has
been kept to reduce the risk for lost sales. Today, the company is
expanding, and therefore need to improve the inventory control to
reduce tied-up capital.
Purpose:
The main purpose of this thesis is to reduce capital tied-up in
inventories. By creating an inventory control model the company
will gain better control of the inventory levels.
Deliverables: The focus has been to develop a model to find a suitable balance
between inventory levels, shipment quantities and maintaining high
service levels towards the customers.
Methodology: The authors began early in the process by collecting information
about the project from meetings with the supervisor at Ur&Penn
and also acquired more knowledge from meetings with the thesis
supervisor, Sven Axsäter. His literature as well as other relevant
material was studied.
From the literature study the authors could formulate the
theoretical part and decide which models that could be applicable in
this thesis. Through meetings they also got the understanding of
what the objective and goals were, and could then start with the
empirical part by gathering all data needed from the business
software system to be able to select brands and items for further
investigation. The selected brands to study were the two most
inventory intensive brands, Regal and Citizen. The authors also
carried out several interviews to receive information from
employees at Ur&Penn.
The next step was to create the inventory control model. The model
is based on the theory, information gathered about the products
through the data system as well as from the interviews with the
employees.
Results:
The model calculates all the necessary parameters for controlling an
inventory system. In this thesis, the model also has the feature of
comparing calculated inventory levels with the actual inventory
levels at the examined point of sales.
III
Sales data from 2010 was inserted into the model to simulate a
forecast from historical data and then weekly updated through
2011, as if it would have been in real time. The inventory levels for
each week and month were then calculated and compared to the
actual inventory levels of 2011.
The results showed a reduction of inventory levels at the examined
point of sales for both the selected group of Citizen watches and
Regal watches. The most superior examined alternative were with a
holding cost percentage of 45 % and an individual service level of
70%, which resulted in a 55 % reduction of the average monthly
inventory level for the group of Citizen watches and a 23 %
reduction for the group of Regal watches. The method works well
for Citizen watches while the Regal group suffered from a stock-out
at the end of the year. The reason for this stock-out was an
unusually long review period caused by a period of no sales during
2011, due to the withdrawal of the Regal group from the stores, but
also the low value of Regal and its highly fluctuating demand.
The recommendation to Ur&Penn is to choose a holding cost
percentage of 30 %, even though it provides slightly higher
inventory levels, since a holding cost percentage of 45 % is hard to
justify. The authors also recommend setting a low individual service
level (S2 ≥ 70% or S2 ≥ 80%) for the grouped articles since the
products are going to be able to substitute each other in the case of a stock-out of a group member.

• author: Svanfeldt, Paul and Werner, Henrik
• supervisor: Sven Axsäter
• organization: Production Management
• course: MIO920
• year: 2012
• type: M1 - University Diploma
• subject: Technology and Engineering
• other publication id: 12/5420
• language: English
• id: 2857084
• date added to LUP: 2012-07-02 10:43:20
• date last changed: 2012-07-02 10:43:20