Managing Fashion Goods Inventories: Dynamic Recourse for Retailers with Outlet Stores

Abstract

The proliferation of both online and bricks and mortar outlet stores underscores the observation that secondary markets are readily accessible to retailers of short-life-cycle products. These secondary markets provide recourse channels for retailers to sell excess inventory of out-of-favor items at reduced prices when overstocking occurs in a primary market. We study the problem of determining when a retailer should terminate its primary selling season by selling remaining inventory on a secondary market. The retailer has a single opportunity to procure prior to a primary selling season consisting of multiple periods. Demand in each period is random, but correlated. At the end of each period, any remaining inventory incurs a holding cost. Then, based upon the current level of inventory and the cumulative demand-to-date, the retailer decides either to terminate the primary selling season by selling all or part of the remaining inventory on a secondary market, or to extend the current primary selling season by another period. We develop structural properties of the optimal policy for determining when to terminate the primary selling season, and we develop corresponding implications for procurement.

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