Stockout-Based Substitution and Inventory Planning in Textbook Retailing

Manufacturing & Service Operations Management, Forthcoming

43 Pages Posted: 30 May 2015

See all articles by Joonkyum Lee

Joonkyum Lee

Sogang University

Vishal Gaur

Cornell University - Samuel Curtis Johnson Graduate School of Management

Suresh Muthulingam

The Pennsylvania State University, Smeal College of Business

Gary Swisher

Cornell University

Date Written: May 29, 2015

Abstract

We demonstrate the value of utility-based choice models to estimate demand and plan inventory for new and used textbooks in the presence of consumer choice and stockout-based substitution at a university textbook retailer. Demand information is censored, the exact time of stockout is not observed, and the short selling season often does not allow for replenishment. Using data for 26,749 book titles from 2007 to 2011 and a simulation experiment calibrated on real data, we show that an attribute-based choice model generates accurate demand estimates (mean absolute percentage error less than 1%) even when nearly 90% of the textbooks in the fit sample experience stockout. This performance is driven by the heterogeneity of product attributes and is robust to the occurrence of product returns. We implement this model at the bookstore in a controlled field experiment and obtain over 10% increase in profit. The results show that accounting for asymmetric and stockout-based substitution in demand estimation and inventory planning enables us to make systematic corrections in inventory mix and inventory level compared to the existing process.

Keywords: OM Practice, Retailing, Inventory Theory and Control, Demand Estimation, Stockout-Based Substitution

Suggested Citation

Lee, Joonkyum and Gaur, Vishal and Muthulingam, Suresh and Swisher, Gary, Stockout-Based Substitution and Inventory Planning in Textbook Retailing (May 29, 2015). Manufacturing & Service Operations Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2611872

Joonkyum Lee (Contact Author)

Sogang University ( email )

Seoul 121-742
Korea, Republic of (South Korea)

Vishal Gaur

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

HOME PAGE: http://www.johnson.cornell.edu/faculty/profiles/Gaur/

Suresh Muthulingam

The Pennsylvania State University, Smeal College of Business ( email )

University Park, PA 16802
United States

Gary Swisher

Cornell University ( email )

Ithaca, NY 14853
United States

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