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Dynamic Assortment Customization with Limited Inventories

Author

Listed:
  • Fernando Bernstein

    (Fuqua School of Business, Duke University, Durham, North Carolina 27708)

  • A. Gürhan Kök

    (College of Administrative Sciences and Economics Koç University, 34450 Istanbul, Turkey)

  • Lei Xie

    (School of International Business Administration, Shanghai University of Finance and Economics, 200433 Shanghai, China)

Abstract

We consider a retailer with limited inventory of identically priced, substitutable products. The retailer faces a market with multiple segments of customers that are heterogeneous with respect to their product preferences. Customers arrive sequentially, and the firm decides which subset of products to offer to each arriving customer depending on the customer’s preferences, the inventory levels, and the remaining time in the season. We show that it is optimal to limit the choice set of some customers (even when the products are in stock), reserving products with low inventory levels for future customers who may have a stronger preference for those products. In certain settings, we prove that it is optimal to follow a threshold policy under which a product is offered to a customer segment if its inventory level is higher than a threshold value. The thresholds are decreasing in time and increasing in the inventory levels of other products. We introduce two heuristics derived by approximating the future marginal expected revenue by the marginal value of a newsvendor function that captures the substitution dynamics between products. We test the impact of assortment customization using data from a fashion retailer. We find that the potential revenue impact of assortment customization can be significant, especially when customer heterogeneity is high and when the products’ inventory-to-demand ratios are asymmetric. Our findings suggest that assortment customization can be used as another lever for revenue maximization in addition to pricing.

Suggested Citation

  • Fernando Bernstein & A. Gürhan Kök & Lei Xie, 2015. "Dynamic Assortment Customization with Limited Inventories," Manufacturing & Service Operations Management, INFORMS, vol. 17(4), pages 538-553, October.
    • Handle: RePEc:inm:ormsom:v:17:y:2015:i:4:p:538-553
    DOI: 10.1287/msom.2015.0544
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    Cited by:

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    2. Mofidi, Seyed Shahab & Pazour, Jennifer A., 2019. "When is it beneficial to provide freelance suppliers with choice? A hierarchical approach for peer-to-peer logistics platforms," Transportation Research Part B: Methodological, Elsevier, vol. 126(C), pages 1-23.
    3. Hense, Jonas & Hübner, Alexander, 2022. "Assortment optimization in omni-channel retailing," European Journal of Operational Research, Elsevier, vol. 301(1), pages 124-140.
    4. Mehrani, Saharnaz & Sefair, Jorge A., 2022. "Robust assortment optimization under sequential product unavailability," European Journal of Operational Research, Elsevier, vol. 303(3), pages 1027-1043.
    5. Çömez-Dolgan, Nagihan & Fescioglu-Unver, Nilgun & Cephe, Ecem & Şen, Alper, 2021. "Capacitated strategic assortment planning under explicit demand substitution," European Journal of Operational Research, Elsevier, vol. 294(3), pages 1120-1138.
    6. Çömez-Dolgan, Nagihan & Moussawi-Haidar, Lama & Jaber, Mohamad Y. & Cephe, Ecem, 2022. "Capacitated assortment planning of a multi-location system under transshipments," International Journal of Production Economics, Elsevier, vol. 251(C).
    7. Fernando Bernstein & Sajad Modaresi & Denis Sauré, 2019. "A Dynamic Clustering Approach to Data-Driven Assortment Personalization," Management Science, INFORMS, vol. 67(5), pages 2095-2115, May.
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    9. Guillermo Gallego & Gerardo Berbeglia, 2021. "Bounds, Heuristics, and Prophet Inequalities for Assortment Optimization," Papers 2109.14861, arXiv.org, revised Oct 2023.
    10. Kameng Nip & Zhenbo Wang & Zizhuo Wang, 2021. "Assortment Optimization under a Single Transition Choice Model," Production and Operations Management, Production and Operations Management Society, vol. 30(7), pages 2122-2142, July.
    11. Xi Chen & Zachary Owen & Clark Pixton & David Simchi-Levi, 2022. "A Statistical Learning Approach to Personalization in Revenue Management," Management Science, INFORMS, vol. 68(3), pages 1923-1937, March.
    12. Zhang, Wei & Rajaram, Kumar, 2017. "Managing limited retail space for basic products: Space sharing vs. space dedication," European Journal of Operational Research, Elsevier, vol. 263(3), pages 768-781.
    13. Michael D. Wittman & Peter P. Belobaba, 2017. "Personalization in airline revenue management – Heuristics for real-time adjustment of availability and fares," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 16(4), pages 376-396, August.
    14. Wenjia Ba & Haim Mendelson & Mingxi Zhu, 2020. "Sales Policies for a Virtual Assistant," Papers 2009.03719, arXiv.org.
    15. Nathan Kallus & Madeleine Udell, 2020. "Dynamic Assortment Personalization in High Dimensions," Operations Research, INFORMS, vol. 68(4), pages 1020-1037, July.
    16. Felipe Caro & A. Gürhan Kök & Victor Martínez-de-Albéniz, 2020. "The Future of Retail Operations," Manufacturing & Service Operations Management, INFORMS, vol. 22(1), pages 47-58, January.
    17. Xiao-Yue Gong & Vineet Goyal & Garud N. Iyengar & David Simchi-Levi & Rajan Udwani & Shuangyu Wang, 2022. "Online Assortment Optimization with Reusable Resources," Management Science, INFORMS, vol. 68(7), pages 4772-4785, July.
    18. David B. Brown & James E. Smith, 2020. "Index Policies and Performance Bounds for Dynamic Selection Problems," Management Science, INFORMS, vol. 66(7), pages 3029-3050, July.
    19. Markus Ettl & Pavithra Harsha & Anna Papush & Georgia Perakis, 2020. "A Data-Driven Approach to Personalized Bundle Pricing and Recommendation," Manufacturing & Service Operations Management, INFORMS, vol. 22(3), pages 461-480, May.
    20. Nan Liu & Peter M. van de Ven & Bo Zhang, 2019. "Managing Appointment Booking Under Customer Choices," Management Science, INFORMS, vol. 65(9), pages 4280-4298, September.
    21. Nan Liu & Stacey R. Finkelstein & Margaret E. Kruk & David Rosenthal, 2018. "When Waiting to See a Doctor Is Less Irritating: Understanding Patient Preferences and Choice Behavior in Appointment Scheduling," Management Science, INFORMS, vol. 64(5), pages 1975-1996, May.
    22. Klein, Robert & Koch, Sebastian & Steinhardt, Claudius & Strauss, Arne K., 2020. "A review of revenue management: Recent generalizations and advances in industry applications," European Journal of Operational Research, Elsevier, vol. 284(2), pages 397-412.
    23. Muzaffer Buyruk & Ertan Güner, 2022. "Personalization in airline revenue management: an overview and future outlook," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 21(2), pages 129-139, April.
    24. Adam N. Elmachtoub & Vishal Gupta & Michael L. Hamilton, 2021. "The Value of Personalized Pricing," Management Science, INFORMS, vol. 67(10), pages 6055-6070, October.

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