This paper formulates and analyzes a model to integrate inventory management and promotion decisions in a multi-product environment. The model assumes that actual demands for the items depend on both item availability and the level of promotion used for the item. A notable feature of the model is that customer demand is partially backordered, where the fraction of demand backordered depends on how long a customer has to wait for delivery. The firm is assumed to have a limited promotion budget. The effect of a promotion is modeled through an increase in the demand rate of the item being promoted. We formulate a general, non-stationary, finite horizon version of the problem. However this problem is very difficult to solve optimally. In order to develop insights into the nature of the solution we formulate a stationary version of the general problem with the additional restriction that only one item can be promoted at a time. An efficient solution approach is developed for this stationary version, and limited numerical results are provided. These numerical results indicate that a coordinated approach to promotions and logistics decisions can lead to significantly higher profit for the firm.
Groenevelt, Harry and Majumder, Pranab, "On the impact of electronic commerce on logistics operations" (2003). ICEB 2003 Proceedings. 94.