Article ID: | iaor20041964 |
Country: | United States |
Volume: | 50 |
Issue: | 10 |
Start Page Number: | 793 |
End Page Number: | 822 |
Publication Date: | Oct 2003 |
Journal: | Naval Research Logistics |
Authors: | Smith Stephen A., Agrawal Narenda |
Keywords: | programming: integer |
We consider the problem of optimizing assortments in a multi-item retail inventory system. In addition to the usual holding and stockout costs, there is a fixed cost for including any item in the assortment. Customers' preferences for items include both probabilistic substitution patterns and the desire to purchase sets of complementary items. We develop a demand model to capture this behavior, and derive tractable approximations that allow us to formulate the optimization problem as a 0–1 mixed integer linear program. Numerical examples are solved to illustrate key insights into how both complementary and substitute items affect the optimal assortment and the expected profit.