Abstract
The web-based buying process requires the buyer to navigate through a series of web pages. Moreover, the web pages for a particular buyer can be customized based on his general profile and previous purchasing behavior. Hence, as compared to a traditional retailer, the e-retailer (who sells products directly to customers through the Internet) is able to exercise a much greater influence over the demand level for its products. This allows an e-retailer to proactively dampen the demand for a niche product and guide the customers to generic substitutes when the on-hand inventory level is low relative to the sales rate. Use of proactive demand management (PDM) can reduce inventory related costs and improve the overall profits.
In this paper, we develop a model for e-retailers exercising PDM by adjusting the display prominence of a product to control its supply chain inventory. The demand realized for the product is deterministic but dependant on the level of prominence with which the product is displayed on the web pages. The model considers two levels of prominence for the product’s display. When the product is displayed prominently, all the potential demand is captured. When the product is displayed less prominently, part of the demand for the product is guided to a generic product which has better economies of scale. The price of the product is fixed and there are standard inventory costs such as holding cost, penalty cost and ordering cost. The objective is to maximize the long-run average profits per year. We derive closed form equations for the optimal parameter values for implementing PDM.
A numerical analysis is performed to estimate the benefits of PDM. The numerical analysis reveals that PDM can increase profits by as much as 12%. PDM is more beneficial when a larger proportion of the potential demand for the product can be guided to a generic substitute. PDM is a beneficial strategy to adopt when the inventory related costs per unit of demand are significant compared to the profit margin.
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Apte, U.M., Viswanathan, S. (2007). A Proactive Demand Management Model for Controlling E-Retailer Inventory. In: Apte, U., Karmarkar, U. (eds) Managing in the Information Economy. Annals of Information Systems, vol 1. Springer, Boston, MA. https://doi.org/10.1007/978-0-387-36892-4_15
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DOI: https://doi.org/10.1007/978-0-387-36892-4_15
Publisher Name: Springer, Boston, MA
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