Delegation of Stocking Decisions under Asymmetric Demand Information

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dc.contributor.authorSen, Alper
dc.contributor.authorAlp, Osman
dc.date.accessioned2018-09-19T14:13:09Z
dc.date.available2018-09-19T14:13:09Z
dc.date.issued2017-11-22
dc.description.abstractHeadquarters of a retailer delegates stocking decisions to store managers at its various stores. Store managers have complete information of the local demand process, whereas headquarters has partial information. The problem is how to incentivize the managers to make stocking decisions that minimizes headquarters' expected overage and underage costs. We investigate performance measurement schemes in which headquarters incite store managers make stocking decisions in headquarters' best interests using their private information. Adopting such schemes helps retailers reduce stock-outs and attain desired service levels across their stores. Headquarters knows that the underlying demand process at a store for a product over a replenishment cycle is one of J possible Wiener demand processes, whereas store manager knows the specific process with certainty. Store manager creates a single order before the cycle. Headquarters use an incentive scheme which is based on the end-of-period leftover inventory and on a stock-out occasion at a pre-specified inspection time {\it before} the end of a period. Headquarters' problem to determine the inspection time and relative importance of stock-outs to leftover stock is formulated as a constrained non-linear optimization problem in a single period setting and a dynamic program in a multi-period setting. The proposed ``early inspection'' scheme leads to perfect alignment under certain conditions. Under more general conditions, it provides a near-perfect alignment and performs strictly better than stock-out inspection at the end. Using historical sales data of a retailer, we show that this scheme can lead to considerable cost reduction. Even though attaining high on-shelf availability is crucial in retail, stock-out related measures are not reflected in store managers' performance scorecards. We prescribe a novel, easy and practical method for headquarters with which they can increase on-shelf-availability by relying on their store managers' private demand information. The proposed method decidedly outperforms the computer aided ordering systems that are commonly used in practice.en_US
dc.identifier.citationAlp, O., & Sen, A. (2018). Delegation of Stocking Decisions under Asymmetric Demand Information (pp. 1-37, Working paper).en_US
dc.identifier.doihttp://dx.doi.org/10.11575/PRISM/32943
dc.identifier.urihttp://hdl.handle.net/1880/107762
dc.language.isoenen_US
dc.publisher.departmentOperations and Supply Chain Managementen_US
dc.publisher.facultyHaskayne School of Businessen_US
dc.publisher.institutionUniversity of Calgaryen_US
dc.rightsUnless otherwise indicated, this material is protected by copyright and has been made available with authorization from the copyright owner. You may use this material in any way that is permitted by the Copyright Act or through licensing that has been assigned to the document. For uses that are not allowable under copyright legislation or licensing, you are required to seek permission.en_US
dc.subjectIncentive alignmenten_US
dc.subjectdelegation of stocking decisionsen_US
dc.subjectasymmetric informationen_US
dc.titleDelegation of Stocking Decisions under Asymmetric Demand Informationen_US
dc.typeworking paperen_US
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