Using simulation to determine the reorder point under uncertainty of a retail store

Abstract

This study uses the discrete-event simulation approach to determine the reorder point of a retail store based on an acceptable service level under uncertainty in demand, lead time, and product damage. The proposed model is applied to A1–A12 products in a retail store under study where the owner requires a service level of at least 90%. The model variables are both deterministic (i.e., order quantities, daily inventory cost per unit, purchase cost, and unit selling price) and probabilistic (i.e., client demand, lead time, and product damage). A simulation technique is used to describe the distribution of the probabilistic parameters and to produce them randomly. The profit and customer service simulation results determine the retail store's inventory policy. Since the retailer decided on the ROP based on the simulation results, it has an impact on 1) reducing the total daily inventory of A1–A10 by 23.0%, which would increase storage space for the additional products A11 and A12 to their sales, 2) increasing total daily profit of A1–A10 by 2.9%, and 3) reducing total annual product damage numbers of A1–A10 by 22.2%.