Optimal Inventory Decisions When Offering Layaway

Abstract

This paper presents an inventory management policy for a retailer offering a layaway program. Layaway is a service provided by retailers that allows budget constrained consumers who have sufficiently high valuations to pay for a product in several installments 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 program 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 program. We then identify the market conditions under which the retailer would benefit from a layaway program. Lastly, we consider an extension to capture the influence of the timing of consumer defaults.

Keywords: layaway, inventory management, retail operations, low income/budget consumers

JEL Classification: C61, M11