Inventory Management with Scarcity Effect and Lost-Sales

Project: Research

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The idea behind the proposed project has arisen from recent discussions with a localretail chain. Traditionally, inventory management aims at balancing the trade-offbetween risk of shortage and risk of excess inventory. However, practitioners may notnecessarily see shortages as a curse anymore. In particular, shortage will create theillusion of scarcity among consumers, which may help increase future demand. Firmsneed to take into account this kind of scarcity effect when managing inventory.We will consider a single-item multi-period periodic-review inventory system in whichthe firm makes not only inventory decisions but also availability decisions. In otherwords, the firm does not need to make all inventory available. By withholding inventory,there is a higher chance of shortage, which has a positive impact on future demand. Thegoal is to study how to make inventory and availability decisions to maximize the firm’sexpected total discounted profit.In the extensive literature on inventory management, there are only a few reportedresults for problems with scarcity effects. These reported results come from studies thatfocus on the case of backorder, i.e., outstanding customer demand will be fulfilled in thefuture if there is a shortage. While the backorder assumption is applicable in someindustries, there are many industries where customer demand is lost whenever there is ashortage. There is significant differences between the backorder case and the lost-salescase in availability management: Outstanding demand can still be used to clear withheldinventory (that is not made available) as the outstanding demand will be fulfilled infuture. In the lost-sales case, however, the firm has to bet on future demand to clearwith-held inventory. While the optimal policy structure for the backorder case has beenidentified recently, there is little known about the lost-sales case. The proposed projectwill aim to fill the gap.?


Project number9042425
Grant typeGRF
Effective start/end date1/01/1712/06/20

    Research areas

  • inventory , scarcity , lost-sales , ,