Optimal inventory management with buy-one-give-one promotion

Abstract

Recently, the Buy-One-Give-One (BOGO) model, where the firm donates one unit of its product for every unit purchased, has emerged as a viable option to practice corporate social responsibility. Despite growing public attention to the BOGO model, optimal inventory management and profitability associated with BOGO has not yet been explored adequately in the academic literature. Under the BOGO promotion, inventory management naturally becomes a key decision, since the firm has to produce an extra unit for each unit sold. In this article, we examine optimal inventory management of the BOGO model under stochastic demand and compare it to the standard newsvendor model as well as a model with cash donation. Analogous to the standard newsvendor model, we clearly define the BOGO fractile and optimal stocking quantity. We show that, counterintuitively, it is not necessarily optimal to produce more units under BOGO, due to the trade-off between give-away commitment and reduced product margin. Moreover, although the BOGO model invariably yields a lower profit than the classic newsvendor model or cash donation model if demand remains the same, there often exists a certain level of positive demand shift that renders BOGO more profitable, which helps explain growing presence of BOGO in the marketplace.

Keywords:

• Buy-one-give-one
• inventory management
• corporate social responsibility

Notes

1 https://www.toms.com/one-for-one-en/

2 http://knowledge.wharton.upenn.edu/article/one-one-business-model-social-impact-avoiding-unintended-consequences/

Additional information

Funding

The authors acknowledge the generous support from Social Sciences and Humanities Research Council of Canada (435-2020-0576) and Natural Sciences and Engineering Research Council of Canada (RGPIN 2020-04213). The second author is partially supported by the Canada Research Chair Program. The third author is partially supported by Korea University Business School Research Grant.

Notes on contributors

Soeun Park

Soeun Park is an Assistant Professor of the Marketing and Behavioural Science division at Sauder School of Business at University of British Columbia. She received her BA in mathematics from Columbia University and PhD in Business Administration (Marketing) from Haas School of Business at University of California, Berkeley. Her research interest includes behavioral economics, game theory, and pricing strategies.

Woonghee Tim Huh

Woonghee Tim Huh is a Professor at the Sauder School of Business, University of British Columbia, Canada. He holds bachelor's degrees in Computer Science and Sociology, a master's degree in Mathematics from the University of Waterloo, Canada, and a doctoral degree in Operations Research from Cornell University. His research interests include capacity planning, supply chain management, auction theory, and the semiconductor industry

Byung Cho Kim

Byung Cho Kim is a Professor of Logistics, Service, and Operations Management at Korea University Business School. Before joining Korea University, he served as an Assistant Professor of Business Information Technology at the Pamplin College of Business at Virginia Tech. He received his MS in Statistics from the University of Chicago and PhD from Tepper School of Business at Carnegie Mellon University. His primary research interests include economics of information systems, digital transformation, and technology management.