Inventory management for dual sales channels with inventory-level-dependent demand

Abstract

This paper studies the inventory management problem of dual channels operated by one vendor. Demands of dual channels are inventory-level-dependent. We propose a multi-period stochastic dynamic programming model which shows that under mild conditions, the myopic inventory policy is optimal for the infinite horizon problem. To investigate the importance of capturing demand dependency on inventory levels, we consider a heuristic where the vendor ignores demand dependency on inventory levels, and compare the optimal inventory levels with those recommended by the heuristic. Through numerical examples, we show that the vendor may order less for dual channels than those recommended by the heuristic, and the difference between the inventory levels in the two cases can be so large that the demand dependency on inventory levels cannot be neglected. In the end, we numerically examine the impact of different ways to treat unmet demand and obtain some managerial insights.

Keywords:

• inventory-level-dependent demand
• stochastic dynamic programming
• dual sales channels

Acknowledgements

This work was supported by the grant #71031005, and was also partially supported by the grant #71210002, both from the National Science Foundation of China. The authors are also grateful to the anonymous reviewers and the associate editor for detailed suggestions and feedback.