Profit improvement through a reservation policy for seasonal goods with lognormal demand

Abstract

In modern marketplaces, competitive products frequently face highly volatile demand that negatively impacts retailer profitability. Accordingly, reservation policies are created to reduce demand uncertainty and save holding cost, and thus increase profit. Such policies are especially valuable and necessary to ensure seasonal goods sell as early as possible due to the minor salvage value of unsold units. Meanwhile, price discounts are frequently involved in reservation agreements to incentivize consumers to accept a reservation. This study extends a typical newsboy model to incorporate a reservation policy for seasonal goods with lognormal stochastic demand. Additionally, a comprehensive willingness function that depends on price discount is proposed for making reservations. Finally, an effective and practical ordering-and-pricing model for seasonal goods is developed to optimize order quantity and discount rate during next selling period to maximize retailer-expected profits. Numerical experiment demonstrates that the reserved scheme always outperforms the traditional unreserved scheme in terms of profits.

Keywords:

• inventory control
• reservation policy
• seasonal goods
• stochastic demand

Acknowledgements

The author would like to thank the National Science Council of the Republic of China for supporting this research under Contract No. NSC-98-2410-H-158-002.