International Series in Operations Research & Management Science Volume 223 Series Editor Camille C. Price Stephen F. Austin State University, TX, USA Associate Series Editor Joe Zhu Worcester Polytechnic Institute, MA, USA Founding Series Editor Frederick S. Hillier Stanford University, CA, USA More information about this series at http://www.springer.com/series/6161
Narendra Agrawal Stephen A. Smith Editors Retail Supply Chain Management Quantitative Models and Empirical Studies Second Edition
Editors Narendra Agrawal Department of Operations Management and Information Systems Leavey School of Business Santa Clara University Santa Clara, CA, USA Stephen A. Smith Department of Operations Management and Information Systems Leavey School of Business Santa Clara University Santa Clara, CA, USA ISSN 0884-8289 ISSN 2214-7934 (electronic) International Series in Operations Research & Management Science ISBN 978-1-4899-7561-4 ISBN 978-1-4899-7562-1 (ebook) DOI 10.1007/978-1-4899-7562-1 Library of Congress Control Number: 2015934150 Springer New York Heidelberg Dordrecht London Springer Science+Business Media New York 2009, 2015 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. Printed on acid-free paper Springer Science+Business Media LLC New York is part of Springer Science+Business Media (www.springer.com)
Foreword It is with great pleasure that I can write a foreword for the second edition of the book Retail Supply Chain Management: Quantitative Models and Empirical Studies. I want to congratulate the editors, Narendra Agrawal and Stephen Smith, for compiling this impressive volume. Like its first edition, this volume continues to be a book that provides a solid reference on research on retail supply chains and inspires new research on this subject. Retailing forms the part of the supply chain that interfaces between the ultimate consumers and the rest of the supply chain. As such, it is often viewed as the part of the supply chain where the real demands of the consumers first show up. Whether we are talking about a physical retail store or a virtual store, the consumer demands that occur here drive the demands in the rest of the supply chain. So in that sense, it is like the frontier of all supply chains. It is therefore gratifying to see Naren and Steve focusing their volume on retail supply chains. The innovations, lessons in practice, and new technological solutions in managing retail supply chains are not just important in retailing but crucial in the ultimate effective management of the complete supply chain. There are two distinguishing features in the research of retail supply chains, which the current volume captures well. First, retail supply chains are loaded with a lot of empirical data. This is an area that has traditionally been rich in data, which provides fertile grounds for us to pursue empirical research. Second, research on retail supply chains naturally intersects with research in marketing in two ways category management and pricing. Of course, category management and pricing have traditionally been key areas in the marketing literature. But what the current volume has added is the dimension of supply chain management to these marketing approaches. Integrating category management with inventory planning and coordinating price optimization with supply chain management are unique dimensions that distinguish this book. v
vi Foreword The second edition expanded on the distinguishing features of the previous one with new analytics on data accuracy and visibility, retail workforce management, and business models of fast fashion. These are topics that are both timely and critical to successes in retailing. I am sure that the readers will share my great enthusiasm for this book as a wonderful addition to the emerging literature of retail supply chain management. Thoma Professor of Operations, Information and Technology, Graduate School of Business, Stanford University Stanford, CA, USA Hau L. Lee
Preface We began working in retail supply chain management through the retail research program of the Retail Management Institute (RMI) at Santa Clara University. RMI was founded in 1980 by its current Executive Director, Dale Achabal, who is the L.J. Skaggs Distinguished Professor of Marketing at Santa Clara University. Research at RMI has focused on marketing and supply chain decisions in department store chains and specialty retailers. Over 30 major retail chains have participated in our research by providing data and problem descriptions and by sponsoring projects. The goal of our research has always been to develop new analytical tools for supporting the operational and planning decisions that retailers face. The sponsoring organizations saw the potential benefit from developing new analytical methodologies that could take advantage of the capabilities offered by emerging information technologies in retailing. Consequently, a number of the decision support prototypes developed at RMI were later converted into operational software systems by consulting organizations and application software products by independent vendors. In this sense, the research done at RMI, as well as the research by other authors of chapters in this volume, has led to an array of retailing applications that constitute a great success story for management science and for supply chain management in particular. We are very pleased to present the second edition of our book following the tremendous success of the first one. This has provided the authors an opportunity to update their contributions to include the most recent developments in our field since 2009 when the first edition was published. We have also added three new chapters on recent topics which reflect areas of great interest and relevance to the academic and professional communities alike. These topics are fast fashion retail strategies, decision making in the presence of inventory record inaccuracies, and retail workforce scheduling. We hope that the new edition will serve as a useful resource for academic researchers and practitioners who are looking for the state of the art on studies on the topic of retail supply chain management. vii
viii Preface We are grateful to all authors who have contributed their research to this endeavor and thank them for their patience as we went through multiple rounds of the review process for their submissions. We are indebted to our colleagues who painstakingly reviewed the various revisions of the submissions, adhering to standards typical of professional journals. These reviewers include Goker Aydin (Indiana University), Gerard Cachon (University of Pennsylvania), Nicole DeHoratius (University of Chicago), Vishal Gaur (Cornell University), Warren Hausman (Stanford University), Kirthi Kalyanam (Santa Clara University), Gürhan Kök (Koç University), Steven Nahmias (Santa Clara University), Marcelo Olivares (Columbia University), Andy Tsay (Santa Clara University), and Jin Whang (Stanford University). Finally, we would like to thank Gary Folven, our original editor with Kluwer and later with Springer Publishing, who encouraged us to undertake this project and supported our efforts. Matthew Amboy, the current Editor (Business & Economics: OR & MS) at Springer, has also been extremely supportive of our work and patient with our schedules. We wish to thank our colleagues from the Marketing Department, Dale Achabal, Shelby McIntyre, and Kirthi Kalyanam, for collaborating with us on a wide range of projects. Many retail executives from sponsoring companies have contributed immensely to our research. There are simply too many for us to acknowledge individually but we are very grateful for their continued support. And we are especially grateful to our wives, Niti Agrawal and Karen Graul, and our children, Nishant and Nihar Agrawal, and Greg and Daniel Smith, for graciously supporting us during the time it took to complete this volume. Santa Clara, CA, USA Narendra Agrawal Stephen A. Smith
Contents 1 Overview of Chapters... 1 Narendra Agrawal and Stephen A. Smith 2 Supply Chain Planning Processes for Two Major Retailers... 11 Narendra Agrawal and Stephen A. Smith 3 The Effects of Firm Size and Sales Growth Rate on Inventory Turnover Performance in the U.S. Retail Sector... 25 Vishal Gaur and Saravanan Kesavan 4 The Role of Execution in Managing Product Availability... 53 Nicole DeHoratius and Zeynep Ton 5 Analytics for Operational Visibility in the Retail Store: The Cases of Censored Demand and Inventory Record Inaccuracy... 79 Li Chen and Adam J. Mersereau 6 An Overview of Industry Practice and Empirical Research in Retail Workforce Management... 113 Saravanan Kesavan and Vidya Mani 7 Category Captainship Practices in the Retail Industry... 147 Mümin Kurtuluş and L. Beril Toktay 8 Assortment Planning: Review of Literature and Industry Practice... 175 A. Gürhan Kök, Marshall L. Fisher, and Ramnath Vaidyanathan 9 Fast Fashion: Business Model Overview and Research Opportunities... 237 Felipe Caro and Victor Martínez-de-Albéniz ix
x Contents 10 Managing Variety on the Retail Shelf: Using Household Scanner Panel Data to Rationalize Assortments... 265 Ravi Anupindi, Sachin Gupta, and M.A. Venkataramanan 11 Optimizing Retail Assortments for Diverse Customer Preferences... 293 Stephen A. Smith 12 Multi-location Inventory Models for Retail Supply Chain Management... 319 Narendra Agrawal and Stephen A. Smith 13 Manufacturer-to-Retailer Versus Manufacturer-to-Consumer Rebates in a Supply Chain... 349 Goker Aydin and Evan L. Porteus 14 Clearance Pricing in Retail Chains... 387 Stephen A. Smith 15 Markdown Competition... 409 Seungjin Whang Index... 425
Contributors Narendra Agrawal Department of Operations Management and Information Systems, Leavey School of Business, Santa Clara University, Santa Clara, CA, USA Victor Martínez-de-Albéniz IESE Business School, University of Navarra, Barcelona, Spain Ravi Anupindi Technology and Operations, Stephen M. Ross School of Business, University of Michigan, Ann Arbor, MI, USA Goker Aydin Kelley School of Business, Indiana University, Bloomington, IN, USA Felipe Caro UCLA Anderson School of Management, Los Angeles, CA, USA Li Chen Fuqua School of Business, Duke University, Durham, NC, USA Nicole DeHoratius Booth School of Business, University of Chicago, Chicago, IL, USA Marshall L. Fisher The Wharton School, University of Pennsylvania, Philadelphia, PA, USA Vishal Gaur Johnson Graduate School of Management, Cornell University, Ithaca, NY, USA Sachin Gupta Johnson Graduate School of Management, Cornell University, Ithaca, NY, USA Saravanan Kesavan Kenan-Flagler Business School, University of North Carolina at Chapel Hill, Chapel Hill, NC, USA A. Gürhan Kök College of Administrative Sciences and Economics, Koç University, Istanbul, Turkey Mümin Kurtuluş Owen Graduate School of Management, Vanderbilt University, Nashville, TN, USA xi
xii Contributors Vidya Mani Supply Chain and Information Systems, Penn State Smeal College of Business, University Park, PA, USA Adam J. Mersereau Kenan-Flagler Business School, University of North Carolina, Chapell Hill, NC, USA Evan L. Porteus Graduate School of Business, Stanford University, Stanford, CA, USA Stephen A. Smith Department of Operations Management and Information Systems, Leavey School of Business, Santa Clara University, Santa Clara, CA, USA L. Beril Toktay College of Management, Georgia Institute of Technology, Atlanta, GA, USA Zeynep Ton MIT Sloan School of Management, Cambridge, MA, USA Ramnath Vaidyanathan Desautels Faculty of Management, McGill University, Montréal, QC, Canada M.A. Venkataramanan School of Business, Indiana University, Bloomington, IN, USA Seungjin Whang Graduate School of Business, Stanford University, Stanford, CA, USA
Editor s Biography Narendra Agrawal is the Benjamin and Mae Swig Professor in the Department of Operations Management & Information Systems and has served on the faculty since 1992. He currently serves as the Associate Dean of Faculty. He holds an undergraduate degree in Mechanical Engineering from the Indian Institute of Technology, B.H.U., India; M.S. in Management Science from the University of Texas at Dallas; and an M.A. and Ph. D. in Operations and Information Management from The Wharton School of Business, University of Pennsylvania. Naren s research is in the areas of supply chain management, service supply chain management, and manufacturing competitiveness. He has published his research in journals such as Harvard Business Review, IIE Transactions, Interfaces, Journal of Retailing, Manufacturing & Service Operations Management, Naval Research Logistics, Operations Research, and Production and Operations Management and has contributed chapters in a number of books. He is as an Associate Editor for Manufacturing and Service Operations Management, serves on the editorial review board of Production and Operations Management, and has been an Associate Editor for Management Science. Naren has received a number of teaching awards including the Dean s Award for Teaching Excellence (at Santa Clara University) every year since 1996 and the MBA Core Curriculum Teaching Award at The Wharton School. He has conducted numerous management development seminars internationally and consulted with companies in the retail and hightechnology industries, including AAFES, Adaptec, Barco, The Gap, Hewlett Packard, IBM, KLA-Tencor, ONGC (India), Overstock.com, Pemex (Mexico), Schlumberger, and Silicon Image. He has been an advisor to several Silicon Valley start-ups and is a trustee of Give2Asia, a nonprofit organization that promotes philanthropy to Asia. Stephen A. Smith is Professor of Operations Management and Information Systems in the Leavey School of Business at Santa Clara University, where he served as the Director of Research for the Retail Workbench and Education Center. He received a Ph.D. in Engineering-Economic Systems from Stanford University xiii
xiv Editor s Biography and Bachelor and Master of Science Degrees in Mathematics. Before joining Santa Clara, Professor Smith was a Research Scientist at the Xerox Palo Alto Research Center and was previously a Principal of Pricing Strategy Associates, a consulting partnership. He has received the University Award for Sustained Excellence in Scholarship and was also awarded a Faculty Senate Professorship. He has served in various editorial positions for Operations Research, Management Science, Manufacturing and Service Operations Management, Industrial Engineering Transactions, and International Commerce Review. Professor Smith s current research focuses on inventory and pricing decisions in retail supply chains. He is an author of over 60 research publications, which have appeared in a variety of journals including Management Science, Operations Research, Marketing Science, Journal of Retailing, Journal of Marketing Research, Econometrica, and Journal of Economic Theory, and two books: Service Opportunities for Electric Utilities and Retail Supply Chain Management, which was first published in 2009. He has consulted for a variety of retailers including Target, The Gap, and Levi Strauss and served as a technical advisor for three software start-up companies that developed decision support systems for retailers.