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A Dynamic Programming-Based Heuristic for Markdown Pricing and Inventory Allocation of a Seasonal Product in a Retail Chain

Author

Listed:
  • Vincent C. Li

    (Department of Business Administration, National Chiayi University, 580 Xinmin Road, Chiayi City 60054, Taiwan)

  • Yat-wah Wan

    (Graduate Institute of Logistics Management, National Dong Hwa University, 1 Sec. 2, Da-Hsueh Road, Shou-Feng, Hualien 97401, Taiwan)

  • Chi-Leung Chu

    (Department of Business Administration, National Chiayi University, 580 Xinmin Road, Chiayi City 60054, Taiwan)

  • Yi-Cheng Lin

    (Graduate Institute of Logistics Management, National Dong Hwa University, 1 Sec. 2, Da-Hsueh Road, Shou-Feng, Hualien 97401, Taiwan)

Abstract

The manager is responsible for the operations of a distribution center (DC) and multiple retail outlets selling a seasonal product. Initially, the DC keeps the inventory, which is allocated to the outlets in the season. There are inventory holding costs at the DC and the outlets; variable shipment cost for transferring inventory from the DC; fixed ordering cost and shortage cost at an outlet. Exact demand at each outlet is a decreasing function of price. To maximize the expected profit of the season, the manager needs to determine the markdown prices for retail outlets and quantity of inventory allocated to them. The problem can be modeled as a dynamic program (DP) which takes too heavy computational effort to solve. We develop a DP-based heuristic for solving the problem. The heuristic takes light computational effort and yet has good accuracy. Insights streamlining the markdown operations are deduced from the numerical results.

Suggested Citation

  • Vincent C. Li & Yat-wah Wan & Chi-Leung Chu & Yi-Cheng Lin, 2020. "A Dynamic Programming-Based Heuristic for Markdown Pricing and Inventory Allocation of a Seasonal Product in a Retail Chain," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 37(01), pages 1-30, January.
    • Handle: RePEc:wsi:apjorx:v:37:y:2020:i:01:n:s0217595919500374
    DOI: 10.1142/S0217595919500374
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