In this paper, we consider the problem in which a firm offers a portfolio of products (agricultural seeds) to multiple customer segments comprising farmers under aggressive fill-rate constraints, and some, but not all, customers will accept a substitute to their preferred choice. This business situation is not adequately represented by traditional inventory-management models, where a firm initiates a substitution based on its monetary considerations. By exploiting some recent results on polyhedral expectations, we develop a decomposition-based approach to determine optimal inventory levels for the firm's seed portfolio under aggressive fill-rate targets. The approach provides an exact solution that is implementable in managerial-friendly environments and permits a what-if analysis for real-time decision support. Subsequently we extend the technical development to establish: (i) a simple computable bound on the value of substitution, (ii) a procedure for determining implied penalty costs for substitutable products, and (iii) comparative static results for the product portfolio. We also discuss the implementation of the technical development at a Fortune 100 firm that has resulted in significant monetary savings. Finally, we provide geography- and climate-specific managerial insights for managing seed substitution by end-users.
All Science Journal Classification (ASJC) codes
- Computer Science Applications
- Management Science and Operations Research