Retail Supply Chain Management

We propose a model for the rationalization of retail assortment and stocking decisions for retail category management. We assume that consumers are heterogeneous in their intrinsic preferences for items and are willing to substitute less preferred items to a limited extent if their preferred items are not available. We propose that the appropriate objective function for a far-sighted retailer includes not only short-term profits but also a penalty for disutility incurred by consumers who do not find their preferred items in the available assortment. The retailer problem is formulated as a constrained integer programming problem. We demonstrate an empirical application of our proposed model using household scanner panel data for eight items in the canned tuna category. Our results indicate that the inclusion of the penalty for disutility in the retailer’s objective function is informative in terms of choosing an assortment to carry. We find that customer disutility can be significantly reduced at the cost of a small reduction in short term profits. We also find that the optimal assortment behaves non-monotonically as the weight on customer disutility in the retailer’s objective function is increased.

Starting with a newsvendor model (single-product, single-period, stochastic demand), we build a single-retailer, single-manufacturer supply chain with endogenous manufacturer rebates and retail pricing. The demand uncertainty is multiplicative, and the expected demand depends on the effective (retail) price of the product. A retailer rebate goes from the manufacturer to the retailer for each unit it sells. A consumer rebate goes from the manufacturer to the consumers for each unit they buy. Each consumer’s response to consumer rebates is characterized by two exogenous parameters: α, the effective fraction of the consumer rebate that the consumer values, leading to the lower effective retail price perceived by the consumer, and β, the probability that a consumer rebate will be redeemed. The type(s) of rebate(s) allowed and the unit wholesale price are given exogenously. Simultaneously, the manufacturer sets the size of the rebate(s) and the retailer sets the retail price. The retailer then decides how many units of the product to stock and the manufacturer delivers that amount by the beginning of the selling season. Compared to no rebates, an equilibrium retailer rebate leads to a lower effective price (hence, higher sales volume) and higher profits for both the supply chain and the retailer. An equilibrium consumer rebate also leads to a lower effective price and higher profits for the retailer, but not necessarily for the chain. Under our assumptions, such a consumer rebate (with or without a retailer rebate) allocates a fixed fraction of the (expected) supply chain profits to each player: The retailer gets \(\alpha/(\alpha+\beta)\) and the manufacturer gets the rest, leading to interesting consequences. However, both firms prefer that α be higher and β lower: Even though the manufacturer gets a smaller share of the chain profits, the total amount received is higher. Neither the retailer nor the manufacturer always prefers one particular kind of rebate to the other. In addition, contrary to popular belief, it is possible for both firms to prefer consumer rebates even when all such rebates are redeemed.

We present a stylized model of markdown competition. We consider two retailers who compete in a market with a fixed level of initial inventory. The initial inventory level is only known to the retailer, and not to the other. To maximize the profit, each retailer would mark down at a time of his individual choice. The model assumes deterministic demands, a single chance of price change, and a prefixed set of prices. We consider a two-parameter strategy set where a retailer chooses the timing of markdown as a function of the current time, his inventory level and the other’s move so far. We characterize the equilibrium of the game and derive managerial insights.