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Managing demand uncertainty: Probabilistic selling versus inventory substitution
Zhang, Yi1; Hu, Guowei1; Wang, Shouyang2; Zhang, Juliang1; Fernandez, Vicenc3
AbstractDemand variability is prevailing in the current rapidly changing business environment, which makes it difficult for a retailer that sells multiple substitutable products to determine the optimal inventory. To combat demand uncertainty, both strategies of inventory substitution and probabilistic selling can be used. Although the two strategies differ in operation, we believe that they share a common feature in combating demand uncertainty by encouraging some customers to give up some specific demand for the product to enable demand substitution. It is interesting to explore which strategy is more advantageous to the retailer. We endogenize the inventory decision and demonstrate the efficiency of probabilistic selling through demand substitution. Then we analyze some special cases without cannibalization, and computationally evaluate the profitability and inventory decisions of the two strategies in a more general case to generate managerial insights. The results show that the retailer should adjust inventory decisions depending on products' substitution possibility. The interesting computational result is that probabilistic selling is more profitable with relatively lower product similarity and higher price-sensitive customers, while inventory substitution outperforms probabilistic selling with higher product similarity. Higher demand uncertainty will increase the profitability advantage of probabilistic selling over inventory substitution.
KeywordOR in marketing Probabilistic selling Opaque selling Inventory substitution Demand uncertainty
Funding ProjectNSFC[71390334] ; NSFC[71532002] ; Beijing Philosophy and Social Science Foundation[13JGB042] ; Fundamental Research Funds for the Central Universities[2015jbwy011]
WOS Research AreaEngineering ; Operations Research & Management Science
WOS SubjectEngineering, Industrial ; Engineering, Manufacturing ; Operations Research & Management Science
WOS IDWOS:000423635600005
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Document Type期刊论文
Corresponding AuthorHu, Guowei
Affiliation1.Beijing Jiaotong Univ, Beijing 100044, Peoples R China
2.Chinese Acad Sci, Acad Math & Syst Sci, Beijing 100190, Peoples R China
3.Univ Politecn Cataluna, Dept Management, Terrassa 08222, Spain
Recommended Citation
GB/T 7714
Zhang, Yi,Hu, Guowei,Wang, Shouyang,et al. Managing demand uncertainty: Probabilistic selling versus inventory substitution[J]. INTERNATIONAL JOURNAL OF PRODUCTION ECONOMICS,2018,196:56-67.
APA Zhang, Yi,Hu, Guowei,Wang, Shouyang,Zhang, Juliang,&Fernandez, Vicenc.(2018).Managing demand uncertainty: Probabilistic selling versus inventory substitution.INTERNATIONAL JOURNAL OF PRODUCTION ECONOMICS,196,56-67.
MLA Zhang, Yi,et al."Managing demand uncertainty: Probabilistic selling versus inventory substitution".INTERNATIONAL JOURNAL OF PRODUCTION ECONOMICS 196(2018):56-67.
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