Delegation of Stocking Decisions Under Asymmetric Demand Information

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 highly costly in retail, but less concern for managers, as their exact amounts usually not recorded. In order align incentives and attain desired service levels, retailers need mechanisms absence information on shortage quantities. Methodology: The headquarters knows underlying demand process at is one J possible Wiener processes, whereas manager specific process. creates single before each period. uses an scheme based end-of-period leftover inventory stock-out occasion prespecified inspection time end determine significance relative evaluating performance manager. formulate constrained nonlinear optimization period setting dynamic program multiperiod setting. Results: show proposed “early inspection” leads perfect alignment when equals two under mild conditions. more general cases, we performs strictly better than inspecting stock-outs achieves near-perfect alignment. Our numerical experiments, using both synthetic real data, reveal this can lead considerable cost reductions. Managerial implications: Stock-out-related measures typically included managers’ scorecards retail. propose novel, easy, practical measurement does depend actual amount shortages. This new incentivizes use private retailer’s best interest clearly outperforms centralized ordering systems common practice.