Maximizing revenue of end of life items in retail stores

Abstract

Classical and even contemporary global supply chains have been built to reduce lead times and minimize costs. That has led companies to compete on the value of their supply chains as a competitive weapon. In this new era, many enterprises are realizing that supply chains can be revenue producing and help their sustainability efforts.In this light, we consider the discount pricing of products that are being phased-out in retail stores. The decision to replace an item triggers a time horizon for the retailer to sell the existing inventory, hence the need to develop markdown strategies to deal with the issues of how much to discount the item, when to introduce these discounts, and if inventory should be left at the end of the time horizon to sell at some salvage price to a third party wholesaler. In this paper, we develop two models. The first one is an optimal markdown strategy that maximizes revenue from the discontinued items using multi-period nonlinear programming. The mathematical properties of the model are established and a closed form optimal solution is found. The second one is a linear programming model that addresses the issues of when and for how long during the phase-out time horizon to apply prices chosen from a pre-determined price set. These models are tested with real data provided by a retailer.