Multi-Product Inventory Management under Customer Substitution and Capacity Restrictions
Operations Research, Forthcoming
Posted: 16 Feb 2013 Last revised: 22 Jul 2019
Date Written: February 15, 2013
The presence of customer substitution poses substantial challenges to a firm’s inventory management, particularly so when the firm has to manage a multi-product portfolio with capacity restrictions. In this paper, we derive the optimal inventory policy for a capacity-constrained firm selling multiple partially substitutable products over a finite season in a market with stockout-based customer substitution. We also establish the sensitivity of the optimal policy with respect to changes in capacity and substitution preferences. In doing so, we disentangle the direct and indirect dynamics of substitution, and show the non-monotonic, and partially counterintuitive influence of capacity and substitution on the firm’s optimal inventory policy.
Keywords: inventory management, newsvendor, capacity, stockout-based substitution, multi-product
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