The Role of Schedule Mismatch in Ending Inventory Decisions in the Presence of Price Cuts

Abstract

In the high-tech sector, component suppliers are often able to offer preannounced price cuts (price markdowns) to manufacturers due to technological innovation that allows them to produce the existing components at lower costs. In this context, manufacturers (buyers) are primarily concerned with their existing inventory carried beyond the price cuts in order to lower inventory costs. In this research, we develop a newsvendor-based decision model for this problem based on our experience in industry and a focal case study environment. Specifically, we consider the issue of delivery and demand uncertainties, and the interplay of the buying firm's operating hours and the transportation carrier's delivery hours, which combine to influence inventory costs and order fulfillment. We illustrate the results with numerical examples and sensitivity analyses, using a real world data set. We found that stockout cost plays a critical role in the ending inventory decisions. Lowering stockout cost will benefit buyers from lower risk of obsolescence costs.