IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Conditions that cause risk pooling to increase inventory

  • Yang, Hongsuk
  • Schrage, Linus
Registered author(s):

    We say product A is a partial substitute for product B if a fraction of the customers who prefer B are willing to accept A when B is out of stock. When demand is uncertain, it is intuitive and true that a larger "willing to substitute" fraction implies larger expected profits. A higher "willing to substitute" fraction allows one to pool the risk of individual products. It may also be intuitive that a larger "willing to substitute" fraction might result in lower optimal total inventory. For the full substitution structure, several researchers have shown that for certain distributions such as the exponential, this latter intuition is not true. We show that this full substitution anomaly can occur with any right skewed demand distribution. We assume i.i.d. demand distributions unless we indicate otherwise. We also show that the anomaly can occur for a number of realistic situations of partial substitution with commonly used demand distributions such as Normal, exponential, Poisson, and uniform. We also demonstrate the anomaly for more than one period, with backlogging, lost sales, more than two products, and with setup costs.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.sciencedirect.com/science/article/B6VCT-4RSRDGH-1/2/86500cc3ab2925bba18abef4c92c000a
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 192 (2009)
    Issue (Month): 3 (February)
    Pages: 837-851

    as
    in new window

    Handle: RePEc:eee:ejores:v:192:y:2009:i:3:p:837-851
    Contact details of provider: Web page: http://www.elsevier.com/locate/eor

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Ricardo Ernst & Panagiotis Kouvelis, 1999. "The Effects of Selling Packaged Goods on Inventory Decisions," Management Science, INFORMS, vol. 45(8), pages 1142-1155, August.
    2. Gerchak, Yigal & Wang, Shaun, 1997. "Liquid asset allocation using "newsvendor" models with convex shortage costs," Insurance: Mathematics and Economics, Elsevier, vol. 20(1), pages 17-21, June.
    3. Edward Ignall & Arthur F. Veinott, Jr., 1969. "Optimality of Myopic Inventory Policies for Several Substitute Products," Management Science, INFORMS, vol. 15(5), pages 284-304, January.
    4. L. Randall Wray & Stephanie Bell, 2004. "Introduction," Chapters, in: Credit and State Theories of Money, chapter 1 Edward Elgar.
    5. Rajaram, Kumar & Tang, Christopher S., 2001. "The impact of product substitution on retail merchandising," European Journal of Operational Research, Elsevier, vol. 135(3), pages 582-601, December.
    6. Kenneth R. Baker & Michael J. Magazine & Henry L. W. Nuttle, 1986. "The Effect of Commonality on Safety Stock in a Simple Inventory Model," Management Science, INFORMS, vol. 32(8), pages 982-988, August.
    7. Ravi Anupindi & Maqbool Dada & Sachin Gupta, 1998. "Estimation of Consumer Demand with Stock-Out Based Substitution: An Application to Vending Machine Products," Marketing Science, INFORMS, vol. 17(4), pages 406-423.
    8. Ravi Anupindi & Yehuda Bassok, 1999. "Centralization of Stocks: Retailers vs. Manufacturer," Management Science, INFORMS, vol. 45(2), pages 178-191, February.
    9. Jovan Grahovac & Amiya Chakravarty, 2001. "Sharing and Lateral Transshipment of Inventory in a Supply Chain with Expensive Low-Demand Items," Management Science, INFORMS, vol. 47(4), pages 579-594, April.
    10. Lingxiu Dong & Nils Rudi, 2004. "Who Benefits from Transshipment? Exogenous vs. Endogenous Wholesale Prices," Management Science, INFORMS, vol. 50(5), pages 645-657, May.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:192:y:2009:i:3:p:837-851. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.