Effects of customer response to fashion product stockout on holding costs, order sizes, and profitability in omnichannel retailing

• Published date: 01 January 2019
• DOI: http://doi.org/10.1111/itor.12511
• Author: Berdymyrat Ovezmyradov,Hisashi Kurata
• Date: 01 January 2019

Intl. Trans. in Op. Res. 26 (2019) 200–222

DOI: 10.1111/itor.12511

INTERNATIONAL

TRANSACTIONS

IN OPERATIONAL

RESEARCH

Effects of customer response to fashion product stockout

on holding costs, order sizes, and profitability

in omnichannel retailing

Berdymyrat Ovezmyradov and Hisashi Kurata

Graduate School of Systems and Information Engineering, University of Tsukuba, Tsukuba 305-8573, Japan

E-mail: s1530145@u.tsukuba.ac.jp [Ovezmyradov]; kurata@sk.tsukuba.ac.jp [Kurata]

Received 6 May2017; received in revised form 22 December 2017; accepted 23 December 2017

Abstract

In retailing practice, customers mayactively respond in one of the following ways after experiencing stockout

of a preferred brand: switch to a substitutablebrand, switch to another store (where the preferred brand could

be available), or delay purchase (backlogging). This paper presents a model of active customer responses to

stockoutof fashion products. In the single-period model, a retailer maximizes profit byselling two substitutable

brands through twodifferent stores. Analytical results and numericalexperiments suggest that active response

to stockout increase the retailer’s profitability due to(a) additional revenue from backlogging and brand and

store switching and (b) decreasein optimal order size resulting in lower holding costs. Omnichannel fulfillment

offers additional opportunities for retailers to benefit from active responses to stockout.

Keywords:newsvendor model; fashion supply chain; response to stockout; omnichannel

1. Introduction

A distinct retail trend in recent decades correspondsto the remarkable growth of retailchains, such as

Walmart, that offer nearly identical merchandise within each of their numerous stores worldwide,

thereby increasing the likelihood of substitution between brands and stores at the same retailer

(Walmart, 2017). The only outcome of stockout assumed in traditional supply chain models is lost

sales when customers experience stockout and then immediately quit a store without purchasing

anything. As per Corsten and Gruen’s (2005) report, common behavior involves the active response

of consumers to stockout in one of the following ways: delaying the purchase (hereafter referred to

as backlogging), choosing to switch to a substitutable brand at the same store, or visiting another

store (where the preferred brand could be available). To distinguish these responses from lost sales,

we collectively referto backlogging and brand and store switching as the active response of customers

to stockout (abbreviated throughout this paper as AR).

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2018 The Authors.

International Transactionsin Operational Research C

2018 International Federation ofOperational Research Societies

Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main St, Malden, MA02148,

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B. Ovezmyradov and H. Kurata / Intl. Trans.in Op. Res. 26 (2019) 200–222 201

Apparel stores regularly face demand uncertainty and high inventory risks, including unsold sur-

plus (overstock) and shortages (understock). The fashion industry’s peculiarities help in explaining

the inherently heightened probability of either overstock or understock as follows: changing trends

in every season imply that fashion products have a short life cycle and long lead time while textile

and apparel supply chains comprise multiple stages of production and distribution with tight profit

margins and intense competition between numerous suppliers and retailers (Fernie and Sparks,

2014). Stockout-related revenue losses in the apparel supply chain may constitute 4% of retail sales

(Lowson et al., 1999).

A notable technological development in recent years related to the introduction of omnichannel

retailing. With omnichannel fulfillment, modern retailers’ online and physical stores are integrated

into a seamless shopping experience (Piotrowicz and Cuthbertson, 2014). In 2015, online consumer

spending for apparel and accessories reached $51.5 billion, thereby making fashion products as

the biggest category in e-commerce shopping (Halzack, 2016). This necessitated a major shift

toward omnichannel retailing by apparel companies who sought to stay competitive. As argued

in the present study, an important dimension of omnichannel retailing corresponds to customers’

response to product stockout. The central topic of the present study is a modeling framework for

analyzing the AR of fashion products.

The research question of the present study is as follows: how does customer behavior regard-

ing unavailability of fashion products affect optimal ordering policy and expected profits of om-

nichannel retailers? The main contribution of this study to existing literature is the development

of modeling framework to analyze the effects of AR of fashion products in an omnichannel re-

tailer’s supply chain. The newsvendor model includes backlogging and brand and store switching

between two brands of substitutable products that are each sold by two separate stores belong-

ing to a single retailer. This model is relatively simple yet still suitable for the practical purposes

of practitioners. Theoretical insights from the presented analysis provide a better understanding

of how fashion retailers could make more accurate decisions with respect to the order size of

substitutable fashion products in the presence of AR and holding costs. The results indicate that

AR can improve profitability through the following: (a) additional revenue from backlogging and

spillover demand by brand and store switchers; and (b) a decrease in optimal order size and as-

sociated savings in holding costs. In contrast to existing models, we highlight the importance of

holding costs in the single-period model and extend the classic newsvendor to account for both

holding costs and AR. Finally, we compare results of the present study with those obtained by

previous studies on the response to stockout and discuss the manner in which the effect of order

reduction depends on the presence of a competitive setting in a supply chain model. The man-

agerial implications of the findings are that retailers should carefully consider their response to

stockout and holding costs patterns while designing and managing their fashion supply chains.

The emergence of omnichannel fulfillment has recently created exceptional conditions for the ac-

curate assessment and promotion of each component of AR across a retailer’s stores and product

assortments.

The rest of the paper is organized as follows. In Section 2, we review related literature. In Section

3, we present a base model of supply chain, structure, assumptions, and notations. In Section 4,

we introduce the AR model. In Section 5, we conduct numerical experiments. Section 6 highlights

our main findings and the managerial implications for retailers. In Section 7, we summarize the

implications for external suppliers. Section 8 presents a final summary.

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2018 The Authors.

International Transactionsin Operational Research C

2018 International Federation of OperationalResearch Societies