Impact of frequency of alignment of physical and information system inventories on out of stocks: A simulation study

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 defined by the stock loss parameter (λ) and the frequent alignment of physical and information system inventories on the stockout (Sout) 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 Sout. 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, by selecting a moderate value of alignment frequency (f), the effective value of stock loss parameter (λe) can be reduced to∼ λ/f. The accuracy of Sout and I values across a number of runs in the simulation studies, sensitivity of Sout 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, verified under various scenarios, indicate that there is a significant reduction in stockout loss when the alignment is done monthly vs. annually, but it does not add much value beyond a monthly check.