Integrated Pricing and Inventory Control Presentation

Motivation

Pricing and Inventory Control of Substitutable Products

Mustafa Karakul School of Administrative Studies York University Ann Chan Grado Department of Industrial and Systems Engineering Virginia Tech.

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Motivation

Outline

• Problem description and formulation • Solution approach • Effects of pricing and substitution on supply chain • Future research avenues

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Problem Description

Introduce a new product, which

Problem Description

Existing Product •  Market for this product is at equilibrium •  Price, r1, is fixed at equilibrium level •  Demand D1 = m1 (r2 ) + "1 , "1 ~ F1 (•) over [0, !1 ] New Product •  Price, r2, is a decision variable and greater than r1 •  Costs more than the existing product •  Demand D2 = m2 (r2 ) + " 2 , " 2 ~ F2 (•) over [0, ! 2 ] •  ! 2 is independent of !1.

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• has the functionality of our existing product • is more sophisticated, and has more features

Example:

• Skin care products – Foundation; basic function • Introduce foundation with vitamin, reduce

wrinkles, let skin breath, hypo-allergenic. is to make skin look good.

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Problem Description

•  New product can substitute the existing one § One-way substitution with price rs = !r1 , ! > 0 § Customers accept substitution with probability ps

Timeline of the events •  Make procurement and pricing decisions at the beginning of the period. •  Get the orders. •  Supply every customer type by its own product first. •  If excess demand for existing product and excess inventory for the new product at the end of period, do substitution.

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Recent Related Literature

Substitution •  Pasternack and Drezner 91: 2-product, 2-way substitution •  Bassok et al. 99: multi-product, one-way substitution •  Netessine et al. 02: multi-product, correlated demands Pricing and Substitution Integrated •  Birge 98: very specific cases. •  Not much!!

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Problem Formulation

Properties

• Linear procurement, holding and shortage costs...