An Empirical Analysis of Intra-Firm Product Substitutability in Fashion Retailing

Production and Operations Management, forthcoming

45 Pages Posted: 5 Sep 2019 Last revised: 19 Aug 2021

See all articles by Elcin Ergin

Elcin Ergin

McGill University - Desautels Faculty of Management

Mehmet Gumus

McGill University - Desautels Faculty of Management

Nathan Yang

Cornell University

Date Written: August 18, 2021

Abstract

This study offers an empirical investigation of inventory and sales dynamics in a large-scale retail network setting. We infer the impact of product shortages on sales in neighboring outlets using unique data from a large fast fashion retailing chain and an Instrumented Difference-in-Differences (DDIV) methodology. Our analysis reveals that sales for a particular item at a focal store increases when that same item experiences stock-outs in neighboring stores. Our empirical findings suggest that there is substitutability across stores, and that this substitutability is the strongest in the period when the stock-out is observed for the first time, and decreases as time passes following the stock-out. In order to assess the implications of considering the impact of stock-outs on inventory allocation, we develop an optimization model that is calibrated using parameters estimated via our earlier DDIV analysis. The simulation analysis confirms that revenues markedly improve on average by 6% under low demand variance and by 14% under high demand variance when neighboring stock-out information is taken into account for sales forecasting while optimizing initial inventory allocations. Finally, we conduct sensitivity analysis to evaluate how these potential revenue improvements vary with turnover, product price, and inventory.

Keywords: Big Data, Causal Inference, Customer Search, Fast Fashion Industry, Location Intelligence, Product Substitutability, Quasi-Experimental Econometrics, Retail Analytics and Network, Revenue Management, Spatial Substitution.

Suggested Citation

Ergin, Elcin and Gumus, Mehmet and Yang, Nathan, An Empirical Analysis of Intra-Firm Product Substitutability in Fashion Retailing (August 18, 2021). Production and Operations Management, forthcoming, Available at SSRN: https://ssrn.com/abstract=3444467 or http://dx.doi.org/10.2139/ssrn.3444467

Elcin Ergin (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Mehmet Gumus

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Nathan Yang

Cornell University ( email )

Dyson School, Warren Hall
360E
Ithaca, NY 14853-6201
United States
6072551590 (Phone)

HOME PAGE: http://dyson.cornell.edu/faculty-research/faculty/ncy6/

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