Inventory control with demand substitution: new insights from a two-product Economic Order Quantity analysis

We study optimal inventory control of two products with demand substitution, that is, where customers switch to the other product if their first choice is not on hand. Going back to the basics, we present a stylized Economic Order Quantity type model with two substitute products having the same constant demand rate and cost structure. Different from the literature, we do not presume that both products must be ordered at the same time. This leads to new insights into when no, partial, and full substitution are optimal. Most interestingly, it turns out that this symmetric problem can have an asymmetric solution. If partial substitution is optimal, then this is always achieved by one-way substitution and never by two-way substitution. (C) 2022 The Author(s). Published by Elsevier Ltd.

Automated summary

This study examines the optimal inventory control of two products with demand substitution. Using a simplified Economic Order Quantity model, the authors present new insights into the optimal ordering strategies for two substitute products and find that partial substitution is always achieved through one-way substitution rather than two-way substitution.