Price Sensitive Demand, Item Velocity, and Corresponding Inventory Policies

Hojung Shin
Department of Management and Administrative Sciences
Mendoza College of Business
University of Notre Dame
Notre Dame, IN 46556
574-631-9021, Shin.7@nd.edu

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In practice, lot size adjustment, price promotion and lead time reduction are used as main options in managing inventories to achieve better supply chain efficiency. If the current inventory level is relatively high for a retailer due to weaker demand, the retailer may 1) decrease its own ordering quantity or 2) reduce its price to induce more demand. Effectiveness of the alternative remedies may vary depending on how price-sensitive demand is or how fast the items are moving. The primary objective of the proposed research is to show that the optimal inventory policies can be interpreted differently within the alternative business environments. In retrospect, we conduct a series of sensitivity analysis on the conventional continuous review (r, Q) model in order to evaluate the impacts of price sensitivity and magnitude of demand on the effectiveness of each inventory management option. The preliminary analysis overall indicates that magnitude of demand and corresponding item velocity, and price elasticity are good measures for choosing the appropriate inventory management policies. For instance, a promotion can be much more effective with larger and highly price sensitive demand.

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