Assessing the impact of inventory inaccuracies within a Newsvendor framework

This paper examines a Newsvendor framework in which a wholesaler who sells products to retailers is subject to inaccuracies in inventory data. The wholesaler’s decision regarding the management of his warehouse inventory is based on inventory data recorded in the information system. We assume that the wholesaler uses barcode labels and scanners in order to gather information concerning the available inventory in the warehouse. Because of errors arising during the manual barcode scanning process, the information on the available inventory level can deviate from the physical quantity and can result in an additional cost. This paper quantifies the economic impact of having uncertainty on the inventory level. We first analyze the case of a wholesaler that is not aware of inventory errors or chooses to ignore them in order to evaluate the efficiency loss due to errors compared with an error free situation. We then assess the effect of various actions enabling to tackle the inventory inaccuracy issue with a particular focus on actions such as the deployment of a new data capture technology.