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INSIGHT BY ANALOGY - Soft Drink Machine

A classic example of a periodic review inventory system is a soft drink machine.

At regular intervals a vendor visits the machine, checks the inventory levels and
refills the machine. Because the capacity of the machine is fixed, the vendor uses
an order-up-to policy, where the order-up-to-level is set by how much the machine
can hold.
To begin with, suppose that the replenishment cycle is fixed (e.g., the vendor
fills the machine every Friday). Clearly the factor that affects the fill rate (percent
of customers who do not find the machine empty) is the average demand rate (µ in
the above notation). A machine in a prime location near the employee lunchroom
is much more likely to stock out than a machine in a remote corner of an overly air
conditioned building.
Of course, to compensate for this, the vendor would visit the high demand
machine more frequently than the low demand machine. For instance, suppose
the lunchroom machine had average demand of 20 bottles per day and the remote
machine had average demand of 4 bottles per day. Then if the vendor replenished
the lunchroom machine every 2 days and the remote machine every 10 days, both
would have average demand of 40 bottles during the replenishment cycle.
If the replenishment cycle is set so that average demand is the same, then other
factors, will determine the fill rate. The most important is the standard deviation
of demand (σ in the above notation). For instance, suppose the lunchroom machine
and a machine on a beach both sell on average 20 bottles per day. However, demand
at the lunchroom machine is very steady, while demand at the beach machine varies
widely depending on the weather. So, while the lunchroom machine sells very nearly
20 bottles every day, the beach machine might sell 40 one (hot) day and none the
(cold, rainy) next. If the vendor visits these two machines on the same cycle, the
beach machine would stock out much more frequently than the lunchroom machine.
To achieve comparable customer service, the beach machine would either have to
hold more bottles or be refilled more frequently.
Finally, another alternative to improve customer service without excess visits by
the vendor would be to switch from a periodic to a continuous review system. If the
bottler were to embed radio frequency identification (RFID) devices in the bottles,
then the vendor could monitor the stock levels in all machines in his/her region and
only replenish machines when they are close to empty. With clever scheduling, the
vendor should be able to visit machines less often and still achieve better customer