Simulation study of a two‐level warehouse inventory replenishment system

Purpose – This paper aims to discuss a simulation study for a multi‐product, two‐echelon inventory replenishment system. The paper compares a one‐warehouse N ‐retailer replenishment system to a two‐warehouse, N ‐retailer system with cost per unit of distribution and delivery lead‐times as the performance measures. The purpose is to demonstrate that under specific circumstances a two warehouse N ‐retailer inventory replenishment system provides better customer service without significant changes in the cost. Design/methodology/approach – Mathematical modeling and simulation methodology is used to test the performance of the proposed two warehouse N ‐retailer system and statistical analysis is used to compare the performance of several scenarios. Findings – The two warehouse replenishment system indeed reduces delivery lead‐times, used as a measure of customer service, under specific conditions such as controllable freight costs. Research limitations/implications – Caution should be exercised when interpreting these findings as the historical data used was from a single source. The paper did not investigate the effects of variable shipping costs from the manufacturing plant, warehouse and retailer. Future research could also consider multiple second level warehouses. Practical implications – The findings provide a persuasive argument for manufacturers struggling with performance issues and channel relationships. Moreover, in addition to contributing to efficiency of distribution, two level systems can also enhance ability to adapt to local market conditions and to unexpected demand variations. Originality/value – The model examined in this paper addressed a specific case for one company. While freight costs and warehousing costs will vary across companies, the cost represented here may be used as a gauge for evaluating systems with cost structures in the vicinity of those for the company represented in this paper. Additionally, the model is amenable to substitution of other firms' cost structures.