Inventory Integration with Rational Consumers

Abstract

Retailers have increasingly pursued initiatives to combine inventory located throughout their enterprise into a single stock from which customers anywhere in their distribution network may purchase. Also known as inventory pooling, this practice is well known to generate operational value by reducing inventory requirements and stock-outs. In “Inventory Integration with Rational Consumers,” Aflaki and Swinney examine a different consequence of pooling: how it influences customer purchasing behavior. They show that integration can lead to behavioral consequences resulting from changing customer purchasing incentives, especially for seasonal goods that are sold in end-of-season clearance sales. These behavioral effects can be negative, and can even outweigh the operational benefits of pooling, if pooling leads to an increase in clearance sale inventory availability that encourages more customers to wait for discounts before buying. Specific conditions that lead to negative (or positive) behavioral value of integration are discussed. Overall, the results illustrate that the ways customers react to inventory pooling can be just as important as its operational consequences.

Inventory pooling and pricing decisions in multiple markets with strategic customers

“…Bhatnagar and Bing [5] study joint transshipment and production control policies for multi-location production/inventory systems, in which items are manufactured and stocked at each location to meet demand. Only Aflaki and Swinney [1] analyze the value of inventory pooling for a firm selling to rational consumers with two markets. None of the above studies investigate the effect of consumer behavior on retailers' inventory pooling and pricing decisions with multiple markets.…”

“…Wang et al [31] address the optimal inventory decision for a retailer considering strategic and myopic consumers with and without a quick response. Indeed, the vast majority of the strategic customer behavior literature ignores inventory pooling; an exception is Aflaki and Swinney [1], who studied the impact of inventory pooling in channels and strategic customer responses but only considered two markets.…”

“…We assume that any amount of unsold inventory at the end of the selling season can be salvaged to a discount or outlet store (or any other selling channel) at a price 𝑠 to serve a distinct set of consumers, which we refer to as bargain hunters. This assumption is made to ensure that all inventory can be cleared at the end of the season, which will enable us to derive closed-form expressions for firm inventory and profit (see also Su and Zhang [30], Cachon and Swinney [7], Aflaki and Swinney [1]). Each product is valued by customers at 𝜐, which can be considered the customer's utility from consuming the product.…”

“…This section presents the results of numerical experiments for high-and low-profit products, respectively. We consider two distinct markets to verify our results and use the same parameters as that in Aflaki and Swinney [1].…”