Enhancing Retail Inventory Replenishment Amid Product Life Cycle Shifts: A System Dynamics Approach

Abstract

Introducing a new product into a retail assortment presents significant challenges for inventory planning, particularly when an existing product is nearing the end of its life cycle. These challenges are amplified by fluctuating daily demand and the need for optimal replenishment strategies. Our study addresses these challenges through a system dynamics modeling approach that simulates the impact of new product demand patterns on inventory decisions. By examining the interplay between new and existing product demands, the model highlights the critical importance of setting a minimum demand threshold to prevent premature phase-out and mitigate stockouts. The analysis also emphasizes the need to incorporate substitution effects into inventory planning frameworks to enhance decision-making and develop robust management systems. Additionally, our research explores how demand patterns for newly introduced competing products can determine whether an existing product is phased out early or retained for an extended period. The study reveals that assortment choices are more intricate for competing products characterized by fluctuating demand patterns. The study also highlights the role of safety stock adjustments, review periods, and demand forecasting time windows to mitigate stockouts and reduce lost sales. Using empirical data from a fashion retailer, the simulations yield actionable insights, emphasizing the need for accurate demand forecasting and effective replenishment strategies. More importantly, this work offers practical guidance for retail operations managers to optimize product assortment timelines and manage safety stock levels to reduce lost sales and improve inventory management systems.