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Inventory control with demand substitution: new insights from a two-product Economic Order Quantity analysis

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  • Teunter, Ruud H.
  • Kuipers, Stefan

Abstract

We study optimal inventory control of two products with demand substitution, that is, where customers switch to the other product if their first choice is not on hand. Going back to the basics, we present a stylized Economic Order Quantity type model with two substitute products having the same constant demand rate and cost structure. Different from the literature, we do not presume that both products must be ordered at the same time. This leads to new insights into when no, partial, and full substitution are optimal. Most interestingly, it turns out that this symmetric problem can have an asymmetric solution. If partial substitution is optimal, then this is always achieved by one-way substitution and never by two-way substitution.

Suggested Citation

  • Teunter, Ruud H. & Kuipers, Stefan, 2022. "Inventory control with demand substitution: new insights from a two-product Economic Order Quantity analysis," Omega, Elsevier, vol. 113(C).
    • Handle: RePEc:eee:jomega:v:113:y:2022:i:c:s0305048322001190
    DOI: 10.1016/j.omega.2022.102712
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    References listed on IDEAS

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    4. Freeman, Nickolas K. & Narayanan, Arunachalam & Keskin, Burcu B., 2021. "Optimal use of downward substitution in a manufacturing operation subject to uncertainty," Omega, Elsevier, vol. 103(C).
    5. Serguei Netessine & Nils Rudi, 2003. "Centralized and Competitive Inventory Models with Demand Substitution," Operations Research, INFORMS, vol. 51(2), pages 329-335, April.
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    Cited by:

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    2. Dai, Bo & Chen, Haoxun & Li, Yuan & Zhang, Yidong & Wang, Xiaoqing & Deng, Yuming, 2023. "An alternating direction method of multipliers for optimizing (s, S) policies in a distribution system with joint replenishment volume constraints," Omega, Elsevier, vol. 116(C).

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