Kroger Uses Simulation-Optimization to Improve Pharmacy Inventory Management

Abstract

The Kroger Co. is the largest grocery retailer in the United States. It operates 2,422 supermarkets and 1,950 in-store pharmacies. Improving customer service is at the heart of Kroger’s business strategy. Toward this end, Kroger’s operations research team, in collaboration with faculty from Wright State University, developed an innovative simulation-optimization system for pharmacy inventory management. In pharmacy applications, traditional standard statistical distributions fall short of providing accurate pharmacy demand distributions. To overcome business resistance to complex formulas, this simulation-optimization approach uses empirical distributions to model demand, provides end users with a visual intuitive experience, and delivers optimal or near-optimal results in milliseconds through local search heuristics. The system was implemented in October 2011 in all Kroger pharmacies in the United States, and has reduced out-of-stocks by 1.6 million per year, ensuring greater patient access to medications. It has resulted in an increase in revenue of $80 million per year, a reduction in inventory of more than $120 million, and a reduction in labor cost equivalent to $10 million per year.