Retail inventory policy under demand uncertainty and inventory-level-dependent demand

Mohit Srivastava, Peeyush Mehta and Sanjeev Swami

Journal of Advances in Management Research, 2023, vol. 20, issue 2, 217-233

Abstract: Purpose - The purpose of this paper is to determine the inventory replenishment policies when demand rate is a function of the inventory space allocated to the products on retail shelves. Existing results on inventory policies with inventory-level-dependent demand (ILDD) assume deterministic functional forms of the demand rate. In this paper, the authors model the inventory decisions when demand is a function of shelf-space allocation and random uncertainty. The authors provide managerial insights of this paper's results. Design/methodology/approach - The demand rate is assumed to be a function of shelf-space allocation based on two settings in the literature. First, the authors model the demand rate as a function of initial shelf-space allocation. In the next setting, the authors assume that the demand rate is a function of instantaneous inventory level on shelves. In both the settings, the authors also model random demand uncertainty in addition to the shelf-space dependency of demand rate. The objective is to maximize the expected profit and determine the inventory parameters. Findings - In addition to the demand uncertainty, the authors consider linear, power and exponential functional forms of demand rate. Inventory policy that maximizes expected profit is determined when demand rate is a function of initial allocation and displayed inventory level. The results are implementable for practitioners for optimizing the shelf-space allocation and related inventory policy. Originality/value - Most of the extant results on inventory policy with shelf-space-dependent demand do not model the demand uncertainty. The authors model a variety of functional forms of demand rate with ILDD in addition to the demand uncertainty. The results are a building block for more applications in inventory management for real-life applications.

Keywords: Retailing; Shelf space; Inventory-level-dependent demand; Demand uncertainty (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jamrpp:jamr-08-2022-0177

DOI: 10.1108/JAMR-08-2022-0177

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