Joint Product Design and Dynamic Assortment Optimization: Integrating Strategic and Tactical Revenue Management

73 Pages Posted: 29 Apr 2022

See all articles by Mengxin Wang

Mengxin Wang

University of California, Berkeley - Department of Industrial Engineering and Operations Research

Paat Rusmevichientong

University of Southern California - Marshall School of Business

Heng Zhang

Supply Chain Management Department - W.P.Carey School of Business

Zuo-Jun Max Shen

University of California, Berkeley - Department of Industrial Engineering & Operations Research (IEOR)

Date Written: April 22, 2022

Abstract

Revenue management decisions often have both strategic and tactical components. Strategic decisions happen first and set the broad and long-term operational context in which tactical decisions are frequently and repeatedly made, often on a weekly or daily basis. We consider a joint optimization of both strategic and tactical decisions. Specifically, we examine a setting in which the strategic decision is to choose product designs (e.g., price, capacity, return eligibility, and other characteristics) and the tactical decision involves the dynamic assortment optimization over a selling season. Our formulation has many applications, including optimizing products' return eligibility and determining product discounts. We formulate an optimization problem that combines the impact on the expected revenue of both strategic and tactical decisions. To determine the product design, we reformulate the choice-based deterministic linear program, solve its continuous relaxation, and round the resulting solution. By using value function approximations, we obtain a dynamic assortment policy whose expected revenue is at least a constant fraction of the choice-based deterministic linear program, for every product design decision. Combining these two results, we show that our approach provides an approximate solution to the joint optimization with performance guarantees. Numerical experiments based on real transaction data from a major U.S. retailer show that our method has 95%-97% effectiveness, which represents a 10%-13% advantage over methods that fail to fully integrate strategic and tactical decisions. The experiments also demonstrate the prominent role of product design, which explains 85.4% of the total variation of empirically observed effectiveness across different methods.

Keywords: strategic decision, tactical decision, product design, dynamic assortment optimization

Suggested Citation

Wang, Mengxin and Rusmevichientong, Paat and Zhang, Heng and Shen, Zuo-Jun Max, Joint Product Design and Dynamic Assortment Optimization: Integrating Strategic and Tactical Revenue Management (April 22, 2022). Available at SSRN: https://ssrn.com/abstract=4090147 or http://dx.doi.org/10.2139/ssrn.4090147

Mengxin Wang

University of California, Berkeley - Department of Industrial Engineering and Operations Research ( email )

4141 Etcheverry Hall
Berkeley, CA 94720-1777
United States

Paat Rusmevichientong

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States

Heng Zhang (Contact Author)

Supply Chain Management Department - W.P.Carey School of Business ( email )

Tempe, AZ
United States

Zuo-Jun Max Shen

University of California, Berkeley - Department of Industrial Engineering & Operations Research (IEOR) ( email )

IEOR Department
4135 Etcheverry Hall
Berkeley, CA 94720
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
199
Abstract Views
607
Rank
234,610
PlumX Metrics