Management of inventory replenishment and available offerings for goods sold with optional value-added packages

Abstract

In the highly competitive retail industry many retailers bundle goods with optional value-added packages to enhance the attraction of the goods and increase their revenue. Offering such packages affects the sales and hence the inventory management of the goods. To maximize the benefits of bundling, the package offerings should vary with the inventory level of the goods. In this paper we propose a model to analyze the joint optimal management of a single good and its associated package offering and inventory control for the good. We define a procedure to construct superior offerings, which are shown to contain the optimal package offerings for all inventory levels of the goods. After obtaining the structural properties of the superior offerings and applying an existing result on the optimal inventory control, we deduce that the optimal inventory management policy is of the reorder-point, order-up-to-level, or (s, S), type, and the optimal choice of the package offering at any given inventory level of the goods is one of the superior offerings. Numerical examples show that the joint optimization model can substantially improve profitability over the policy of offering the same packages all of the time. © 2005 "IIE".