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The Effects of Selling Packaged Goods on Inventory Decisions

Author

Listed:
  • Ricardo Ernst

    (McDonough School of Business, Georgetown University, Washington, DC 20057)

  • Panagiotis Kouvelis

    (Olin School of Business, Washington University, Saint Louis, Missouri 63130-4899)

Abstract

In this paper, we study within a newsboy type modeling framework the common business practice of retail firms to sell products not only as independent items, but also as part of multiproduct packets (packaged goods). Our emphasis is on understanding the effects of such practices on the inventory decisions of the firm. We provide insights on the resulting level of suboptimality when inventory decisions are made with demand information only on the independent items and without accounting for the demand substitution structure induced between independent items and packaged goods. Our stylized model studies an environment with two products that are not direct substitutes for each other, sold either independently or as part of a packet that contains one unit of each. We provide necessary and sufficient optimality conditions for this model and suggest an efficient numerical search for obtaining the optimal stocking levels. An extensive computational study allowed us to provide insights on the nature of the optimal stocking policies, the suboptimality of independent newsboy policies, the effects of demand correlation among individual products and multiproduct packets, and the determining role of induced substitution structure among products during stockout occasions on the profitability of the inventory system.

Suggested Citation

  • Ricardo Ernst & Panagiotis Kouvelis, 1999. "The Effects of Selling Packaged Goods on Inventory Decisions," Management Science, INFORMS, vol. 45(8), pages 1142-1155, August.
  • Handle: RePEc:inm:ormnsc:v:45:y:1999:i:8:p:1142-1155
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    File URL: http://dx.doi.org/10.1287/mnsc.45.8.1142
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    References listed on IDEAS

    as
    1. Schmalensee, Richard, 1984. "Gaussian Demand and Commodity Bundling," The Journal of Business, University of Chicago Press, vol. 57(1), pages 211-230, January.
    2. William James Adams & Janet L. Yellen, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 90(3), pages 475-498.
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    Citations

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    Cited by:

    1. Ye, Taofeng, 2014. "Inventory management with simultaneously horizontal and vertical substitution," International Journal of Production Economics, Elsevier, vol. 156(C), pages 316-324.
    2. Bulut, Zümbül & Gürler, Ülkü & Sen, Alper, 2009. "Bundle pricing of inventories with stochastic demand," European Journal of Operational Research, Elsevier, vol. 197(3), pages 897-911, September.
    3. Zhang, Ren-Qian & Zhang, Lan-Kang & Zhou, Wen-Hui & Saigal, Romesh & Wang, Hui-Wen, 2014. "The multi-item newsvendor model with cross-selling and the solution when demand is jointly normally distributed," European Journal of Operational Research, Elsevier, vol. 236(1), pages 147-159.
    4. Chakravarty, A. & Mild, A. & Taudes, A., 2013. "Bundling decisions in supply chains," European Journal of Operational Research, Elsevier, vol. 231(3), pages 617-630.
    5. Goker Aydin & Serhan Ziya, 2008. "Pricing Promotional Products Under Upselling," Manufacturing & Service Operations Management, INFORMS, vol. 10(3), pages 360-376, June.
    6. Montrucchio, Luigi & Scarsini, Marco, 2007. "Large newsvendor games," Games and Economic Behavior, Elsevier, vol. 58(2), pages 316-337, February.
    7. repec:eee:proeco:v:193:y:2017:i:c:p:813-826 is not listed on IDEAS
    8. Vaagen, Hajnalka & Wallace, Stein W. & Kaut, Michal, 2011. "Modelling consumer-directed substitution," International Journal of Production Economics, Elsevier, vol. 134(2), pages 388-397, December.
    9. Ernst, Ricardo & Kamrad, Bardia, 2006. "Estimating demand by using sales information: inaccuracies encountered," European Journal of Operational Research, Elsevier, vol. 174(2), pages 675-688, October.
    10. Gürlera, Ülkü & Öztop, Salih & Sen, Alper, 2009. "Optimal bundle formation and pricing of two products with limited stock," International Journal of Production Economics, Elsevier, vol. 118(2), pages 442-462, April.
    11. Mahesh Nagarajan & S. Rajagopalan, 2008. "Inventory Models for Substitutable Products: Optimal Policies and Heuristics," Management Science, INFORMS, vol. 54(8), pages 1453-1466, August.
    12. Shin, Hojung & Park, Soohoon & Lee, Euncheol & Benton, W.C., 2015. "A classification of the literature on the planning of substitutable products," European Journal of Operational Research, Elsevier, vol. 246(3), pages 686-699.
    13. Geng, Qin & Mallik, Suman, 2007. "Inventory competition and allocation in a multi-channel distribution system," European Journal of Operational Research, Elsevier, vol. 182(2), pages 704-729, October.
    14. Wei, Ying & Chen, Youhua (Frank), 2011. "Joint determination of inventory replenishment and sales effort with uncertain market responses," International Journal of Production Economics, Elsevier, vol. 134(2), pages 368-374, December.
    15. Stavrulaki, Euthemia, 2011. "Inventory decisions for substitutable products with stock-dependent demand," International Journal of Production Economics, Elsevier, vol. 129(1), pages 65-78, January.
    16. Tang, Christopher S., 2006. "Perspectives in supply chain risk management," International Journal of Production Economics, Elsevier, vol. 103(2), pages 451-488, October.
    17. McCardle, Kevin F. & Rajaram, Kumar & Tang, Christopher S., 2007. "Bundling retail products: Models and analysis," European Journal of Operational Research, Elsevier, vol. 177(2), pages 1197-1217, March.
    18. repec:eee:proeco:v:196:y:2018:i:c:p:56-67 is not listed on IDEAS
    19. Mallik, Suman, 2007. "Contracting over multiple parameters: Capacity allocation in semiconductor manufacturing," European Journal of Operational Research, Elsevier, vol. 182(1), pages 174-193, October.
    20. repec:wut:journl:v:1:y:2017:p:77-104:id:1219 is not listed on IDEAS
    21. Li Chen & Erica L. Plambeck, 2008. "Dynamic Inventory Management with Learning About the Demand Distribution and Substitution Probability," Manufacturing & Service Operations Management, INFORMS, vol. 10(2), pages 236-256, May.
    22. Yang, Hongsuk & Schrage, Linus, 2009. "Conditions that cause risk pooling to increase inventory," European Journal of Operational Research, Elsevier, vol. 192(3), pages 837-851, February.

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