Optimizing Markdowns by Leveraging Internal Flexibility in Retail Chains

Research Seminars
Academic Areas Operations Management
Professor Naren Agrawal, Benjamin and Mae Swig Professor of Operations Management & IS, The Leavey School of Business, Santa Clara University, CA, USA
November 4, 2016 | 3:00 PM - 4:30 PM | Friday
AC2 Mini Lecture Theatre, Level 2, Hyderabad, India
Contact: Neha Gupta,
For ISB Community
Abstract: We analyze how inventory dependence of demand affects the optimal pricing and distribution of inventory across multiple retail locations.  Our problem formulation corresponds to the typical markdown management decisions in a retail chain.  The solution methodology determines the optimal combination of three important operational levers - pricing, inventory allocation and store consolidation.   We characterize the optimal price trajectory and show that inventory dependence causes it to decrease over time as the current on-hand inventory decreases.  We determine that the distribution of inventory should be skewed more toward stores with higher demand and away from stores with lower demand, as compared to the case with no inventory effect.   Inventory effect leads to this same optimal distribution of inventory when the markdown price is required to remain constant.  If all stores have the same seasonal variations and the inventory is allocated optimally, then all stores should have identical price trajectories.   Optimal consolidation of the inventory to a subset of the stores is also determined. In fact, consolidation of inventory to a subset of stores can be beneficial even when there are no fixed costs of stocking a store. Using some typical parameter values for retail items, our calculations show that significant benefits can result from taking the inventory effect into account in pricing, inventory allocation and store consolidation decisions.