33 research outputs found
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Optimal inventory decisions when offering layaway
This paper presents an inventory management policy for a retailer offering a layaway programme. Layaway is a service provided by retailers that allows budget constrained consumers who have sufficiently high valuations to pay for a product in several instalments rather than at once and obtain the product that has been reserved for them at the end of the payment period. If a consumer defaults on payments, then the reserved item is released back into store inventory. In this paper, we first determine the retailer's optimal order decisions when layaway is offered. We find that the order quantity under a layaway programme decreases with the likelihood of consumers not finishing their layaway plans and that it is not always profitable for a retailer to offer a layaway programme. We then identify the market conditions under which the retailer would benefit from a layaway programme. Lastly, we consider an extension to capture the influence of the timing of consumer defaults
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Dynamic Pricing of Substitutable Products in the Presence of Capacity Flexibility
Firms that offer multiple products are often susceptible to periods of inventory mismatches where one product may face shortages while the other has excess inventories. In this paper, we study a joint implementation of price- and capacity-based substitution mechanisms to alleviate the level of such inventory disparities. We consider a firm producing substitutable products via a capacity portfolio consisting of both product-dedicated and flexible resources and characterize the structure of the optimal production and pricing decisions. We then explore how changes in various problem parameters affect the optimal policy structure. We show that the availability of a flexible resource helps maintain stable price differences across products over time even though the price of each product may fluctuate over time. This result has favorable ramifications from a marketing standpoint because it suggests that even when a firm applies a dynamic pricing strategy, it may still establish consistent price positioning among multiple products if it can employ a flexible replenishment resource. We provide numerical examples for the price stabilization effect and discuss extensions of our results to a more general multiple product setting
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Dynamic Pricing and Replenishment with Customer Upgrades
We study a joint implementation of priceâ and availabilityâbased product substitution to better match demand and constrained supply across vertically differentiated products. Our study is motivated by firms that utilize dynamic pricing as well as customer upgrades, as ex ante and ex post mechanisms, respectively, to mitigate inventory mismatches. To gain insight into how offering product upgrades impacts optimal price selection, we formulate a multiple period, nested twoâstage model where the firm first sets prices and replenishment levels for each product while the demand is still uncertain, and after observing the demand, decides how many (if any) of the customers to upgrade to a higher quality product. We characterize the structure of the optimal upgrade, pricing and replenishment policies and find that firms having greater flexibility to offer product upgrades can restrain their reliance on dynamic pricing, enabling them to better protect the price differentiation between the products. We also show how the quality differential between the products or changes in the replenishment cost structures influence the optimal policy. Using insights gained from the optimal policy structure, we construct a heuristic policy and find that it performs well across various parameter values. Finally, we consider an extension in which the firm dynamically sets upgrade fees in each period. Our results overall help further our understanding of the intricate relationship among a firm's decisions on pricing, replenishment, and product upgrades in an effort to better match demand and constrained supply
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Optimal control of an assembly system with demand for the end-product and intermediate components
This article considers the production and admission control decisions for a two-stage manufacturing system where intermediate components are produced to stock in the first stage and an end-product is assembled from these components through a second-stage assembly operation. The firm faces two types of demand. The demand for the end-product is satisfied immediately if there are available products in inventory while the firm has the option to accept the order for later delivery or to reject it when no inventory is available. Demand for intermediate components may be accepted or rejected to keep components available for assembly purposes. The structure of demand admission, component production and product assembly decisions are characterized. The proposed model is extended to take into account multiple customer classes and a more general revenue collecting scheme where only an upfront partial payment is collected if a customer demand is accepted for future delivery with the remaining revenue received upon delivery. Since the optimal policy structure is rather complex and defined by switching surfaces in a multidimensional space, a simple heuristic policy is proposed for which the computational load grows linearly with the number of products and its performance is tested under a variety of example problems
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Asymmetric Pricing and Replenishment Controls for Substitutable Products
We study settings in which a firm offering substitutable products may face restrictions in its ability to either replenish or adjust the prices of some of its products, resulting in asymmetries in the pricing and replenishment controls available for each product. Specifically, we first consider a firm selling two substitutable products, a seasonal and a regular product, that differ in how their inventories are managed over a finite selling horizon. The seasonal product has an initial inventory with no further replenishment opportunities and is dynamically priced throughout the selling horizon, whereas the regular product has a static price but can be replenished periodically subject to a limited capacity. We characterize the firmâs optimal replenishment decision for the regular product as well as the dynamic pricing and initial quantity selection decisions for the seasonal product. Through the insights gained by the optimal policy structure, we also develop a simple-to-implement and effective heuristic policy. In addition, we investigate profit implications of markdown policies and study how potential differences in quality perceptions between the products impact the optimal policy. Lastly, we consider further types of asymmetries resulting in pricing with partial replenishment or replenishment with partial pricing and provide insights on the value of additional pricing and replenishment flexibilities. Our study helps broaden our understanding of joint pricing and replenishment decisions for substitutable products under circumstances where these decisions may not all be available for all products
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Disruption Mitigation and Pricing Flexibility
We study a firm that is exposed to random supply chain disruptions while producing a single product. During a disruption, the firm may use reserve inventory and/or reserve capacity to serve customer demand. As supply in the form of reserve inventory and reserve capacity is often lower than demand during a disruption, the firm may choose to increase the price of the product during the disruption. An increase in price reduces demand during the disruption, which may help better match supply and demand during the disruption. We find that pricing flexibility (i.e., the ability to increase the price during a disruption) may complement or substitute the operational mitigation levers of holding reserve inventory or reserve capacity. Specifically, when a firm has pricing flexibility, it may be economical to increase or decrease the use of reserve inventory or reserve capacity relative to a setting without pricing flexibility
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Optimal Dynamic Allocation of Rental and Sales Inventory for Fashion Apparel Products
There is a growing trend towards renting rather than permanent ownership of various product categories such as designer clothes and accessories. In this paper, we study an emerging retail business model that simultaneously serves rental and sales markets. Specifically, we consider a retailer that primarily focuses on renting while also selectively meeting incidental sales demand. Once a unit is sold, the firm forgoes potentially recurring rental revenues from that unit during the remaining periods. Therefore, it is critical for a retailer to dynamically decide how much of its inventory to allocate for sales and rentals at each period. We first develop a consumer choice model that determines the fraction of the market that chooses renting over purchasing. We characterize the optimal inventory allocation policy and explore how market characteristics and prices impact inventory allocation. We discuss the value of dynamic allocation and observe that the profit improvement can be substantial. In addition, we propose a simple and efficient heuristic policy. Finally, we extend our analysis to study the optimal allocation policies for (i) a retailer that is primarily a seller that selectively meets rental demand, and (ii) a retailer that does not enforce any prioritization between rental and sales demand
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Buyer-Supplier Currency Exchange Rate Flexibility Contracts in Global Supply Chains
This paper analyzes a decentralized global supply chain under a newsvendor setting, where a supplier delivers a certain quantity of a single product to a buyer in accordance with the terms of a mutually agreed upon contract. This contract is signed prior to the delivery of the product and subsequent payment, thus, exposing the supply chain to the risk of currency exchange rate fluctuations. We propose two types of currency exchange rate flexibility contracts to explore the characteristics of exchange rate risk mitigation policies for the buyer and the supplier. Furthermore, we investigate the effects of the contract structures on the optimal order quantity, as well as the expected profits of both supply chain members. Our results show that the optimal order quantity of the buyer decreases when the wholesale price is uncertain due to exchange rate volatility. Also, both our proposed contracts tend to improve the expected profits of both the buyer and the supplier, when the payment is made in the supplierâs currency, indicating the desirability of adopting such contractual agreements from the perspective of both parties. On the other hand, when the payment is made in the buyerâs currency, our suggested contracts do not yield such win-win scenarios. Finally, we examine the effectiveness of availing the services of a local vendor, which is capable of satisfying any demand in excess of the quantity ordered from the foreign source with short notice, in order to mitigate the risks associated with an overseas order