Assortment Planning and Inventory Decisions Under a Locational Choice Model

Authors:
Vishal Gaur;Dorothée Honhon
Affiliations:
Department of Information, Operations, and Management Science, Leonard N. Stern School of Business, New York University, 8-160, 44 West 4th Street, New York, New York 10012;McCombs School of Business, University of Texas at Austin, 1 University Station, Austin, TX 78712
Venue:
Management Science
Year:
2006

Citing 9
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Abstract

We consider a single-period assortment planning and inventory management problem for a retailer, using a locational choice model to represent consumer demand. We first determine the optimal variety, product location, and inventory decisions under static substitution, and show that the optimal assortment consists of products equally spaced out such that there is no substitution among them regardless of the distribution of consumer preferences. The optimal solution can be such that some customers prefer not to buy any product in the assortment, and such that the most popular product is not offered. We then obtain bounds on profit when customers dynamically substitute, using the static substitution for the lower bound, and a retailer-controlled substitution for the upper bound. We thus define two heuristics to solve the problem under dynamic substitution and numerically evaluate their performance. This analysis shows the value of modeling dynamic substitution and identifies conditions in which the static substitution solution serves as a good approximation.