Information Inaccuracy in Inventory Systems — Stock Loss and Stockout

Many companies have automated their inventory management processes and rely on an information system in critical decision making. However, if the information is inaccurate, the ability of the system to provide high availability of products at the minimal operating cost can be compromised. In this paper, analytical and simulation modelling demonstrate that even a small rate of stock loss undetected by the information system can lead to inventory inaccuracy that disrupts the replenishment process and creates severe out-of-stocks. In fact, revenue losses due to out-of-stocks can far outweigh the stock losses themselves. This sensitivity of performance to the inventory inaccuracy becomes even higher in systems operating in lean environments. Motivated by an automatic product identification technology under development at the Auto-ID Center, various methods of compensating for the inventory inaccuracy are presented and evaluated. Comparisons of the methods reveal that the inventory inaccuracy problem can be effectively treated even without automatic product identification technologies in some situations.