Assessing Inventory Replenishment Strategy

Abstract

Target’s supply chain strategy centers around delivering on the in-store experience for customers, with stores serving as both brick and mortar retail locations and online fulfillment hubs for store pick-up orders or home delivery. Traditionally, Target stores only served walk-in customers, and fulfilling in-person and online demand from stores is a new strategy. This omnichannel approach has significant operations impact - they must operate a robust replenishment system that can accurately get the right volume of the right product to the right place at the right time to fulfill demand. Simultaneously, stores must greet and help in-store customers, maintain stocked shelves, and ensure there is physical space as well as adequate labor to fulfill a variety of types of online orders from store stock. Today, when more products than can fit on the shelves are delivered, these products spill over into the backroom. This creates re-work for store employees and drives up store labor costs, while also reducing upstream inventory pooling benefits and amplifying risks of shrinkage.

In order to design a replenishment strategy that optimally reduces backroom inventory while maintaining service levels, we examine in this paper three levers that are used to inform the current ordering process: configured leadtime (the time that replenishment logic assumes it will take shipments to arrive in stores after an order is placed), safety stock levels, and shipped unit-of-measure.

Examining historic data and testing optimization strategies on that reveals a set of policies which could improve Target's inventory position substantially.