Retail stocking decisions with order and stock sales

Abstract

Abstract Key factors for success in competitive markets are to be able to offer the customer the product features he/she desires and still maintain low costs. We believe that, just as lean manufacturing has helped reduce inventories in factories, there is a need for lean retailing to reduce the large inventories at retailers. One way to do this is to exploit the potential for order-and-wait sales rather than hold a lot of inventory, especially in high-variety environments. This paper analyzes retailing operations from this perspective and looks at the issue of providing the customer with the option of purchasing from stock or by placing an order, when variety is an inherent feature of the product market. A multi-period, multiproduct model with a constraint on the amount of stock that can be held is developed, with both stock and order-and-wait sales possible. We provide an optimal procedure to solve the problem and develop other key results. First, we show that the optimal quantity of stock to be held by the retailer decreases when the option of placing an order is offered. The idea is that, through identifying and servicing segments of consumers with a propensity to waiting, retailers can reduce their stocking levels (and costs) needed to service those consumers who have no desire to wait for product delivery. Another key conclusion is that, in some contexts, the retailer should actually be offering discounts to those who will place an order and wait for the product they desire. However, under certain conditions, it may indeed be optimal to charge a premium for the ordered item (relative to in-stock items).