A retail inventory policy for cyclical demand: the impact of ignoring demand seasonality

We investigate the value of accounting for demand seasonality in inventory control. We consider a single-location, single-item periodic-review lost sales inventory problem with cyclic demand in a retail environment. Customer demand has seasonality with a known season length, the lead time is shorter than the review period, and orders are placed as multiples of a fixed batch size. Our cost structure comprises a fixed cost per order, a fixed cost per batch and a variable cost per unit, which are used to model retail handling costs. We consider four different settings which differ in the degree of demand seasonality that is incorporated in the model: with or without within-review period variations and with or without across-review periods variations. In each case, we calculate the policy which minimizes the long-run average cost and compute the optimality gaps of the policies which ignore part or all demand seasonality. We apply the problem to a real life setting, using Point-of-Sales data. We find that it is most beneficial to incorporate demand seasonality for high-velocity products with low batch size for which demand across-review periods varies substantially.