Inventory Models with Delivery Upgrade

Abstract

Motivated by real-life business issues of Toyota China dealerships, we consider inventory-control models with delivery upgrades, in which the seller allocates its on-hand inventory to price and delivery-time sensitive customers. The seller has two decisions: inventory commitment and inventory replenishment. The former addresses, within an inventory cycle, how on-hand inventories are allocated between the two classes of customers. The latter addresses, between inventory cycles, how the inventory is replenished. In this paper, we develop the optimal inventory allocation and upgrade, and inventory replenishment policies, and demonstrate that the optimal control can be characterized by a switching curve. We extend our analysis to include cases of upgrade cost, stock-out substitution, and capacity constraint. Finally, we use the Toyota dealership data to calibrate the required parameters and demonstrate the potential of the optimal inventory allocation and upgrade control.