“Timing of product allocation: Using probabilistic selling to enhance inventory management”

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Author Information : Scott Fay (Whitman School of Management, Syracuse University)
Jinhong Xie (Warrington College of Business, University of Florida)

Year of Publication : Management Science (2014)

Summary of Findings : If inventories are not adjusted properly, probabilistic selling (PS) is often not going to be an effective selling strategy; however, PS can be effective if larger inventories are acquired, resulting in improved profit and wider availability of goods to consumers.

Research Questions : How can probabilistic selling enhance inventory management for a company?

What we know : Probabilistic selling is a strategy that allows the seller to offer a “random” product in addition to its normal, fully-specified product.

Despite the rapidly growing adoption of PS in the marketplace, retailers and manufacturers continue to struggle with how to implement it effectively.

Novel Findings : It can be more profitable to allocate products to consumers before, rather than after, learning the true demand for a product, because earlier allocation enables the firm to charge higher prices.

PS can be effective if larger inventories are acquired, resulting in improved profit and wider availability of goods to consumers.

Implications for Practice : PS can be an effective strategy for retailers and manufacturers to manage inventories wisely, maximizing efficiency and profit.

Implications for Society: Adoption of PS can increase social welfare because more customers can be served and they don’t have to wait until end-of-the-season sales to find a good deal.

Implications on Research: This further extends the idea of PS that Fay and his co-author introduced in 2008 by illustrating further how retailers and manufacturers can use the strategy in their operations.

Full Citations : “Timing of product allocation: Using probabilistic selling to enhance inventory management” (with Xie, J.), Management Science, 2014.

http://pubsonline.informs.org/doi/pdf/10.1287/mnsc.2014.1948

Abstract : The paper, titled “Timing of Product Allocation: Using Probabilistic Selling to Enhance Inventory Management,” examines whether probabilistic selling (PS) can help a seller better manage their inventories. While it’s intuitive that PS can help in inventory management when allocations are not made until the seller learns which item is less appealing to consumers, the researchers demonstrate that PS can be effective even if the firm allocates products before knowing which product will be more popular, and thus, scarcer.

“It can be more profitable to allocate products to consumers before, rather than after, learning the true demand for a product because it enables the firm to charge higher prices,” said Fay. “Early allocation effectively allows the seller to commit to random assignments, whereas under late allocations, consumers expect to receive a less popular item.”

Fay and his co-author also explore how optimal inventory levels change as a seller introduces probabilistic goods, and show that PS can simultaneously increase both profit and social welfare.

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Scott Fay

Scott Fay

Professor Fay is an associate professor of marketing and director of the integrated core. He is particularly interested in examining how firms can harness the power of new technologies. Other topics Professor Fay pursues include the personalization process, marketing in social media and reverse auctions.
Scott Fay
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