Inventory Management Model for Stockout Based Substitutable Products

In the apparel market's dynamic environment, fashion firms aim to successfully forecast both the desirability of new collections and the volume of each item to be produced and released in the market under conditions of uncertainty. This research study proposes an inventory-management model developed for substitutable products (sold in several versions or colors) under competitive settings (each retailer sells a single product). The model focuses on stockout based and dynamic based substitutions in inventories. In other words, if there is no inventory of the desired product, the customer will choose to purchase the substitutable product. The model aims to maximize the profits of firms while considering the demand across substitutable products. Under competitive conditions, both retailers will always order positive inventory so as not to lose customers. In addition, an empirical analysis for sales of substitutable items (a product that is offered in different colors) of an online apparel retailer is conducted to empirically estimate the demand distribution.