Modelling consumer directed substitution

Vaagen, Hajnalka and Wallace, Stein W and Kaut, Michal (2011) Modelling consumer directed substitution. International Journal of Production Economics, 134 (2). pp. 388-397. ISSN 0925-5273

Abstract

We discuss the challenges and difficulties arising when approaching and modelling the consumer-directed substitution problem in quick response supply chains. Further, we propose heuristic solutions suited for large problems with complex uncertainty and dependency patterns. Despite the single-period newsvendor model we use, our substitution process is an approximation of the dynamic product choice. To ensure consistency with regard to the information used to establish substitution fractions and information available at the time of optimisation, substitution fraction estimation and inventory/assortment optimisation are discussed simultaneously. The decision-independent substitution preferences applied here do not require inventory or sales transaction data, but reflect understanding on the demand driver attributes. This approach, in turn, leads to increased robustness in assortment planning. Factual substitution is an outcome of the optimisation process, constrained by the available substitutes and unfulfilled demand. Despite being unable to fully describe the dependencies among the substitute choice possibilities, our substitution approach, together with the modelling process, allows handling the most important dependencies, such as negatively correlated substitute choice possibilities and positively/negatively correlated first and second choice possibilities.