The retailer multi-item inventory problem with demand cannibalization and substitution

Retailers of products with limited shelf life are faced with the dilemma of stocking the right mix of standard product and its customized stock keeping units, in each product category. In this paper we model the retailer multi-item inventory problem with demand cannibalization and substitution. The model focuses on the twin problems of optimal portfolio selection as well as optimal stocking under retailing context. Owing to analytical complexity in determining optimal solution, we develop heuristics for solving the problem. Using set of numerical examples we compare the heuristic solutions against the optimal solutions. In addition, we also attempt to understand the impact of important parameters on retailer profits through a series of sensitivity analysis. (c) 2006 Elsevier B.V. All rights reserved.