Inventory Control in the Retail Sector: A Case Study of Canadian Tire Pacific Associates
Brian Kapalka | April 1995
Canadian Tire Pacific Associates owns and operates 21 retail stores in the lower mainland of British Columbia and a central warehouse in Burnaby. In this thesis, we formulate a single-product, single-location model of its inventory system as a first stem in developing an integrated, interactive inventory control system. Specifically, we formulate a Markov chain model for a periodic review system with a deterministic lead time and lost sales. The model utilizes empirical demand data to calculate the long-run average cost of inventory for a given (s,S) policy. We then develop a heuristic that locates a "near" optimal policy quickly. The heuristic incorporates a constraint on the customer service level, makes use of an updating technique for the transition probability matrix, and is based on assumptions regarding the properties of the solution space. Next, we create a prototype of the interface that enables managers to use the model interactively. Finally, we compare the existing inventory policy to the optimal policy for each of 420 products sold at one of the stores. This thesis finds that Canadian Tire Pacific Associates is currently holding excessively large in-store inventory and that it could reduce its cost of inventory by approximately 40% to 50%. We estimate that implementing optimal inventory control in the stores would result in annual savings of between $5.5 and $7 million.