Multiproduct Inventory Planning Considering Consumer Choices and Substitution Effects

Abstract

In the retailing not only the breadth and the depth of an assortment are critical decisions to satisfy the heterogeneous consumer needs in the long run and to foster store loyalty. While the assortment breath specifies the number of different product categories (or product lines) in a store, the depth of an assortment defines the different SKUs (versions) of a product within a specific product category. Typical examples for different versions of a product within a product category are parallel offerings of, for example, national brands and private labels or conventional and organic products. In both examples, the two product versions are very similar as they only differ in a few product features, which implies that when one version is out of stock or otherwise not available, some consumers may buy another version instead.

Determining optimal inventory levels of multiple products within a product category considering that customers substitute if their preferred product is not available is still a huge challenge not only in practice. Also the scientific research has shown that this problem is not easy to tackle, not even for a simple two-product problem. In this paper, we develop an approach to solve the multi-product assortment and inventory planning problem considering stockout-based substitution, specifically for the case of vertically differentiated products. Demand and substitution rates are derived from a utility-based choice model. Compared to previous research, our approach considers substitution rates endogenously, i.e., the probability that a customer is willing to substitute another product from the assortment is derived from choice model. Additionally, we consider multiple substitution attempts in case of stockout of a product (dynamic choices) where previous research was mainly focusing on a single substitution attempt. We further show the benefits of an integrated assortment and inventory planning compared to a sequential approach where first the assortment is optimized and subsequently, optimal inventory levels are determined.

(joint research with Marjolein E. Buisman (WHU – Otto Beisheim School of Management) and Rene Haijema, (Wageningen University) )

Biography

Sandra Transchel is Professor for Supply Chain and Operations Management. From 2008 to 2011 Transchel was Assistant Professor for Supply Chain Management at the Pennsylvania State University, USA. In 2011 she was Visiting Assistant Professor at Tuck School of Business at Dartmouth, USA. In 2008 Dr. Transchel received her PhD from the University of Mannheim, Germany and graduated in March 2004 with a Diploma degree in Business Mathematics from the Otto-von-Guericke University in Magdeburg, Germany.
Transchel’s research interests are in the areas of supply chain management, inventory control, revenue management, and production scheduling. Her current research focuses on retail operations and supply chain management with the special interest in the integration of supply and demand management. Her research conducts theoretical research in inventories to study the relationship between replenishment policies, inventory levels, price strategies, perishability, and customers’ substitution behavior. She also studies optimal price and capacity management in Airline Alliances. Dr. Transchel’s research has appeared in numerous academic journals including Operations Research, European Journal of Operational Research, International Journal of Production Research, International Journal of Production Economics, and Business Research.