Optimal Inventory Decisions When Offering Layaway

International Journal of Production Research, Forthcoming

25 Pages Posted: 26 Jul 2018 Last revised: 24 Sep 2018

See all articles by Stanko Dimitrov

Stanko Dimitrov

University of Waterloo - Department of Management Sciences

Oben Ceryan

Cass Business School, City, University of London

Date Written: July 1, 2018

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

Suggested Citation

Dimitrov, Stanko and Ceryan, Oben, Optimal Inventory Decisions When Offering Layaway (July 1, 2018). International Journal of Production Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3168861 or http://dx.doi.org/10.2139/ssrn.3168861

Stanko Dimitrov (Contact Author)

University of Waterloo - Department of Management Sciences ( email )

Waterloo, Ontario N2L 3G1
Canada

Oben Ceryan

Cass Business School, City, University of London ( email )

London
United Kingdom

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