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Modelling consumer-directed substitution

  • Vaagen, Hajnalka
  • Wallace, Stein W.
  • Kaut, Michal

We discuss the challenges and difficulties arising when approaching and modelling the consumer-directed substitution problem in quick response supply chains. Further, we propose heuristic solutions suited for large problems with complex uncertainty and dependency patterns. Despite the single-period newsvendor model we use, our substitution process is an approximation of the dynamic product choice. To ensure consistency with regard to the information used to establish substitution fractions and information available at the time of optimisation, substitution fraction estimation and inventory/assortment optimisation are discussed simultaneously. The decision-independent substitution preferences applied here do not require inventory or sales transaction data, but reflect understanding on the demand driver attributes. This approach, in turn, leads to increased robustness in assortment planning. Factual substitution is an outcome of the optimisation process, constrained by the available substitutes and unfulfilled demand. Despite being unable to fully describe the dependencies among the substitute choice possibilities, our substitution approach, together with the modelling process, allows handling the most important dependencies, such as negatively correlated substitute choice possibilities and positively/negatively correlated first and second choice possibilities.

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Article provided by Elsevier in its journal International Journal of Production Economics.

Volume (Year): 134 (2011)
Issue (Month): 2 (December)
Pages: 388-397

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Handle: RePEc:eee:proeco:v:134:y:2011:i:2:p:388-397
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  1. Khouja, Moutaz & Mehrez, Abraham & Rabinowitz, Gad, 1996. "A two-item newsboy problem with substitutability," International Journal of Production Economics, Elsevier, vol. 44(3), pages 267-275, July.
  2. 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.
  3. Vishal Gaur & Dorothée Honhon, 2006. "Assortment Planning and Inventory Decisions Under a Locational Choice Model," Management Science, INFORMS, vol. 52(10), pages 1528-1543, October.
  4. Ricardo Ernst & Panagiotis Kouvelis, 1999. "The Effects of Selling Packaged Goods on Inventory Decisions," Management Science, INFORMS, vol. 45(8), pages 1142-1155, August.
  5. Vaagen, Hajnalka & Wallace, Stein W., 2008. "Product variety arising from hedging in the fashion supply chains," International Journal of Production Economics, Elsevier, vol. 114(2), pages 431-455, August.
  6. Garrett van Ryzin & Siddharth Mahajan, 1999. "On the Relationship Between Inventory Costs and Variety Benefits in Retail Assortments," Management Science, INFORMS, vol. 45(11), pages 1496-1509, November.
  7. 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.
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