Early sale of seasonal inventory in the newsvendor problem

Abstract

Off-price retailers buy excess inventory from manufacturers and retailers and offer it at discounts to consumers. Off-price retailers want a larger assortment of trendy products, which provides retailers with a way to sell excess inventory. We analyze a supply chain of a manufacturer who sells a product to a retailer. Upon realizing demand, the retailer can sell excess inventory to the off-price retailer. The retailer and off-price retailer have their exclusive consumer segments and share a dual segment. We find that adding the off-price retailer increases the manufacturer’s optimal expected profit. Interestingly, selling inventory to the off-price retailer may decrease or increase the retailer’s optimal expected profit. The retailer’s optimal expected profit increases when the off-price retailer has a large exclusive consumer segment. Also, centralization in a supply chain with an off-price retailer leads to larger increase in the optimal order quantity and expected profit compared with centralization in a supply chain without an off-price retailer. The off-price retailer can be worse-off by having a large consumer segment shared with the retailer. Finally, the effect of the off-price retailer consumer segment demand being a random variable has only a small effect on the order quantity, the wholesale price, and profits.

Keywords:

• Newsvendor
• off-price retailers
• supply chain management

Funding

This work was supported by the National Science Foundation of China Grants # 71531003 and 71272127.

Notes on contributors

Moutaz Khouja is a Professor of Operations and Supply Chain Management at the University of North Carolina at Charlotte. He obtained a B.S. in Mechanical Engineering and MBA degrees from the University of Toledo and a Ph.D. in Operations Management from Kent State University. His areas of research interest include inventory management, supply chain management, and the operations-marketing interface. His publications have appeared in Decision Sciences, Production and Operations Management, IIE Transactions, European Journal of Operational Research, Journal of the Operational Research Society, Interfaces, Computers and Operations Research, Naval Research Logistics, Omega, Journal of Retailing, Journal of Management Information Systems, and other journals.

Jing Zhou is an Associate Professor of Operations and Supply Chain Management at the University of North Carolina at Charlotte. She obtained a B.S. degree in Operations Research from Fudan University in China, a M.S. degree in Supply Chain Management and a Ph.D. degree in Operations Management from the University of Texas at Dallas. Her areas of research interest include supply chain management, the operations-marketing interface and inventory management. Her publications have appeared in Production and Operations Management, Journal of Retailing, European Journal of Operational Research, Naval Research Logistics, Omega, International Journal of Production Economics, Interfaces, and other journals.