2013 Edelman Finalist Kroger

Kroger Uses Simulation-Optimization to Improve Pharmacy Inventory Management

The Kroger Co. (NYSE:KR) is the largest grocery retailer in the United Sates and the fifth largest retailer in the world. Kroger employs more than 339,000 associates serving customers in 2,422 supermarkets and operates 1,950 in-store pharmacies as part of its convenient one-stop shopping strategy. Improving customer service is at the heart of Kroger's Customer 1st business strategy and towards 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, traditional standard statistical distributions fall short of providing accurate pharmacy demand profiles. To overcome business resistance to complex “black box" formulas, the simulation-optimization approach uses empirical distributions to model demand, provides end users an intuitive experience, allows "plug-and-play" experimentation, and at the same time delivers optimal or near-optimal results in milliseconds. The system was implemented in October 2011 in all pharmacy stores nationwide, and has reduced out-of-stock prescriptions by 1.5 million per year, ensuring greater patient access to medications when they need it. It has resulted in an increase in revenue of $80 million per year, a reduction in inventory by more than $120 million, and a reduction in labor cost equivalent to $10 million per year. The innovative inventory system instantly won support from Kroger's executives, revealed OR to Kroger, and significantly contributed to the growth of Operations Research in Kroger. It is now being extended to other business lines, and has pushed scientific inventory management to become a strategic core competence of Kroger.