An Optimistic-Robust Approach for Dynamic Positioning of Omnichannel Inventories

• URL: http://arxiv.org/abs/2310.12183v1
• Date: Tue, 17 Oct 2023 23:10:57 GMT
• Title: An Optimistic-Robust Approach for Dynamic Positioning of Omnichannel Inventories
• Authors: Pavithra Harsha, Shivaram Subramanian, Ali Koc, Mahesh Ramakrishna, Brian Quanz, Dhruv Shah, Chandra Narayanaswami
• Abstract summary: We introduce a new class of data-driven optimistic-robust bimodal inventory optimization (BIO) strategy. Our experiments show that significant benefits can be achieved by rethinking traditional approaches to inventory management.
• Score: 10.353243563465124
• License: http://arxiv.org/licenses/nonexclusive-distrib/1.0/
• Abstract: We introduce a new class of data-driven and distribution-free optimistic-robust bimodal inventory optimization (BIO) strategy to effectively allocate inventory across a retail chain to meet time-varying, uncertain omnichannel demand. While prior Robust optimization (RO) methods emphasize the downside, i.e., worst-case adversarial demand, BIO also considers the upside to remain resilient like RO while also reaping the rewards of improved average-case performance by overcoming the presence of endogenous outliers. This bimodal strategy is particularly valuable for balancing the tradeoff between lost sales at the store and the costs of cross-channel e-commerce fulfillment, which is at the core of our inventory optimization model. These factors are asymmetric due to the heterogenous behavior of the channels, with a bias towards the former in terms of lost-sales cost and a dependence on network effects for the latter. We provide structural insights about the BIO solution and how it can be tuned to achieve a preferred tradeoff between robustness and the average-case. Our experiments show that significant benefits can be achieved by rethinking traditional approaches to inventory management, which are siloed by channel and location. Using a real-world dataset from a large American omnichannel retail chain, a business value assessment during a peak period indicates over a 15% profitability gain for BIO over RO and other baselines while also preserving the (practical) worst case performance.

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