Browsing by Subject "Incentive alignment"

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Open Access
Delegation of stocking decisions under asymmetric demand information
(Institute for Operations Research and the Management Sciences (INFORMS), 2021-01) Alp, Osman; Şen, Alper
Problem definition: We consider the incentive design problem of a retailer that delegates stocking decisions to its store managers who are privately informed about local demand. Academic/practical relevance: Shortages are highly costly in retail, but are less of a concern for store managers, as their exact amounts are usually not recorded. In order to align incentives and attain desired service levels, retailers need to design mechanisms in the absence of information on shortage quantities. Methodology: The headquarters knows that the underlying demand process at a store is one of J possible Wiener processes, whereas the store manager knows the specific process. The store manager creates a single order before each period. The headquarters uses an incentive scheme that is based on the end-of-period leftover inventory and on a stock-out occasion at a prespecified inspection time before the end of a period. The problem for the headquarters is to determine the inspection time and the significance of a stock-out relative to leftover inventory in eval uating the performance of the store manager. We formulate the problem as a constrained nonlinear optimization problem in the single period setting and a dynamic program in the multiperiod setting. Results: We show that the proposed “early inspection” scheme leads to perfect alignment when J equals two under mild conditions. In more general cases, we show that the scheme performs strictly better than inspecting stock-outs at the end and achieves near-perfect alignment. Our numerical experiments, using both synthetic and real data, reveal that this scheme can lead to considerable cost reductions. Managerial im plications: Stock-out-related measures are typically not included in store managers’ performance scorecards in retail. We propose a novel, easy, and practical performance measurement scheme that does not depend on the actual amount of shortages. This new scheme incentivizes the store managers to use their private information in the retailer’s best interest and clearly outperforms centralized ordering systems that are common practice.
Open Access
Markdown budgets for retail buyers: help or hindrance?
(Wiley-Blackwell, 2017) Şen, A.; Talebian, M.
For many retailers, markdown decisions are taken by retail buyers whose compensation is based on sales revenue so their objective is to maximize it through the season. This implies that the buyers' objectives are not perfectly aligned with the overall profitability the firm. Many retailers set markdown budgets prior to the season to control margin erosion and increase profitability. Markdown budget constrains the buyers on the amount of discounts that they can apply on a given inventory of merchandise and sets a limit on the dollar value of markdowns for the season. While markdown budgets may be useful in preventing excessive discounts, they can have a detrimental effect on the buyers' ability to respond to poor market and remove distressed inventory. We investigate the effectiveness of this practice in aligning the incentives of buyers with that of the firm, and provide guidance on how these budgets should be established ahead of time. We consider a firm with a fixed inventory of a seasonable item, and a single chance to mark the price down. The retailer knows only the demand distribution at the beginning of the season, but the market information is revealed during the season to the buyer. We first characterize the buyer's markdown policy and understand the circumstances under which this can be different from the retailer's markdown policy. We use our model to determine the optimal markdown budget and quantify its effectiveness considering different factors such as the level of demand uncertainty, initial markup, and market's responsiveness to markdowns.