Managing multi-item common vendor inventory system with random demands

This paper deals with developing new heuristic ordering rules for managing multi-item, single vendor inventory systems with random demands. The inventory position for each item is continuously reviewed, and an order is placed when the projected stockout cost for all items exceeds a certain multiple of the average ordering cost. Rules are offered for determining which items to include in the order, and also for determining order-up-to level for each item. These rules involve two parameters, whose optimal values are estimated by simulation. Such systems are encountered in many real life situations, such as independent convenience stores, mom and pop grocery stores, ethnic grocery stores, neighborhood hardware stores, small independent retailers and family pharmacies. Many of these systems are grossly mismanaged from an inventory point of view. Ordering rules developed in this paper are the back-bone of a proposed inventory and order management software required to support such small business operations.