Coordinated inventory control - A case study on its performance compared to the current system at IKEA

Abstract: Coordinated inventory management is not widely used among companies today. Not even modern companies, which should have resources and ability to always be in the forefront of technological developments, prioritizes models that in theory can provide substantial savings. This report illustrates that a slightly more advanced method to calculate the safety stock can increase the service accuracy and significantly reduce inventory costs. The basic idea behind a coordinated inventory approach is to avoid sub optimization by optimizing jointly inventory locations that are dependent of each other, as opposed to optimizing each inventory alone. If information from one inventory is allowed to affect decisions in another, this can be used to together satisfy customers and reducing the total inventory. The study started with locating a simple goods flow within IKEA. This goods flow contains only one distribution center and a number of retail stores. Representative articles that pass through both levels were then chosen. No consideration has been given to these articles flow prior to the shipping to the distribution center. For the selected articles, new coordinated reorder points have been calculated using an analytical multi echelon inventory model. This coordinated solution has been compared to IKEA’s current solution (reorder points) by use of discrete event simulation. The model used to optimize the system in the project has been previously tested on real case scenarios but only on low demand spare articles. This is thus the first time it has been used on end consumer pattern with high demand. This project has resulted in evidence that the use of a coordinated inventory approach reduces inventory without decreasing service level. The largest relative reductions appear at the distribution center, while the mean inventory levels at the retail stores only decrease slightly.