Responding to a One-Time-Only Sale (OTOS) of a Product Subject to Sudden Obsolescence
2003; Allied Academies; Volume: 6; Linguagem: Inglês
ISSN
1524-7252
AutoresPrafulla Joglekar, Patrick P. C. Lee,
Tópico(s)Sustainable Supply Chain Management
ResumoABSTRACT With advancing technologies and shrinking life cycles, today many products are subject to sudden obsolescence. Manufacturers and vendors of products that are subject to sudden obsolescence often announce a one-time-only discount on these products. In this paper, we study a retailer's optimal response to such one-time-only sales (OTOS) of products subject to sudden obsolescence. We build a comprehensive model based on two relevant bodies of literature: the literature on one-time-only sales of non-perishable, non-obsolescent products, and the literature on inventory and pricing decisions for obsolescent products in the absence of any one-time only considerations. Our model allows for price elasticity, accounts for a various types of inventory holding costs, and deals with obsolescence costs and capital costs separately from the holding costs. Our model also allows for the ordering cost of the special one-time only order to be different from the retailer's regular ordering cost. The model is general enough to accommodate non-obsolescent as well as obsolescent products in situations that do or do not involve an OTOS. A numerical example shows that the use of our model can provide some long-term gain and a particularly attractive short-term improvement in a retailer's profit. Sensitivity analysis shows that the benefits of our model are greatest when the discount is sizable; demand is highly price sensitive; and the retailer's ordering cost for the special order is small. INTRODUCTION With rapid advances in technology, abrupt changes in global political situations, and instantaneous dissemination of information in the worldwide market, today product life cycles have decreased dramatically, and a number of products are at risk of becoming obsolete overnight. Swiss watches, computer chips, world maps, breast implants, and Milli Vanilli records are some of the classic examples of this phenomenon. This phenomenon also affects a large number of products whose designs were historically stable for many years, if not decades. For example, fuzzy logic chips have shrunk the lifecycles of such products as washing machines and today's ergonomic focus has rendered obsolescence on older designs of office furniture. For prudent inventory and pricing decisions on products subject to sudden obsolescence (hereafter called S-Obs products), a retailer must account for the costs of obsolescence carefully. Traditionally, obsolescence costs were treated as a component of the holding costs in the economic order quantity (EOQ) model (Hadley & Whitin, 1963; Naddor, 1966; Silver & Peterson, 1985). Then, some authors dealt with obsolescence costs separately from other inventory carrying costs (Barbosa & Friedman, 1979; Brown, 1982; Hill, Girard & Mabert, 1989). However, these early works were focused on gradual rather than sudden obsolescence. Masters (1991) defined sudden obsolescence as a situation when a product's lifetime is negative exponentially distributed, and consequently, the probability of obsolescence is constant at any time. Using an approximate model, Masters (1991) concluded that for S-Obs products, the use of the EOQ model was appropriate, provided that the obsolescence component was computed as the reciprocal of the product's expected life. Joglekar and Lee (1993, 1996) pointed out that the then current industry practice of estimating annual obsolescence costs at 1 to 3% of a product's cost represented a serious underestimate of the true cost. By Master's (1991) formula even a 3% obsolescence cost implies an expected life of 33 years! Masters (1991) warned that in cases of short-life products, failure to use the proper formula could lead to costs that were five to forty percent higher than the optimal costs. Masters' (1991) model was an approximate one. Using an exact formulation, Joglekar and Lee (1993) showed that Masters' model also underestimated the true lifetime costs of his optimal policy while overestimating the optimal order quantity. …
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