An inventory control project in a major Danish company using compound renewal demand models

We describe the development of a framework to compute the optimal inventory policy for a large spare parts distribution centre operation in the refrigeration and air conditioning (RA) division of the Danfoss Group in Denmark. The RA division distributes spare parts worldwide for cooling and air-conditioning systems. The warehouse logistics operation is highly automated. However, the procedures for estimating demands and the policies for the inventory control system that were in use at the beginning of the project did not fully match the sophisticated technological standard of the physical system. During the initial phase of the project development, we focussed on the fitting of suitable demand distributions for spare parts and on the estimation of demand parameters. Demand distributions were chosen from a class of compound renewal distributions. In the next phase, we designed models and algorithmic procedures for determining suitable inventory control variables based on the fitted demand distributions and a service-level requirement stated in terms of an order fill rate. Finally, we validated the results of our models against the procedures that had been in use in the company. It was concluded that the new procedures provided a better fit with the actual demand processes and were more consistent with the stated objectives for the distribution centre. We also initiated the implementation and integration of the new procedures into the company's inventory management system.