CORAL Working Papers,
University of Aarhus, Aarhus School of Business, Department of Business Studies

Abstract: We describe the development of a framework to compute the optimal inventory policy for

a large spare-parts’ distribution centre operation in the RA division of the Danfoss Group

in Denmark. The RA division distributes spare parts worldwide for cooling and A/C

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

focused 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 were considerably more

consistent with the actual demand processes and 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

Keywords: Base-stock policy; compound distribution; fill rate; inventory control; logistics; stochastic processes

26 pages, March 1, 2007

Note: Published as: Larsen, C, Seiding, C H, Teller, C and Thorstenson, A, An Inventory Control Project in a Major Danish Company Using Compound Renewal Demand Models, IMA Journal of Management Mathematics, Vol 19, 2008, pp 145-162

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