Integration Model of Dynamic Inventory Replenishment and Pricing Based on Estimating Demand Substitution for PC Products

Abstract

Motivated by the recent supply chain management practice of the Chinese PC industry, we examine the impact of demand forecasting and demand substitution estimation on inventory management and pricing with short selling seasons for a PC supply chain consisting of one retailer and two manufacturers. Based on PC products’ demand characteristics, product life cycle (PLC) is incorporated into the traditional multiplication demand model and a multi-period dynamic inventory and pricing integrated decision model is developed. This model assumes that retailers always place an initial order at pre-season, and the order quantity would be split into multiple batches following the retailers’ dynamic inventory replenishment requirements under the constraint that the sum of the split orders should be almost the same as the initial order. Meanwhile, the retailer would dynamically determine the selling price according to effective demand and demand forecasting per cycle, and the manufacturers decide the wholesale price and rebate depending upon the retailer’s total order quantities. Finally, empirical analysis is given, and analysis results show that the model enjoys good feasibility and effectiveness, that can overcome the negative impact of high demand fluctuations on profits and service levels. Keywords: Dynamic Inventory Decision, Dynamic Pricing, Demand Forecasting, Product Life Cycle, Demand Substitution