Inventory Model for Downward Substitution in Two-echelon Supply Chain under Stochastic Demand

The substitution between products is a common phenomenon in supply chain management when customers find their favorite product unavailable. Product substitution can improve the availability of different products and thus improve the customer service level, especially when the high-end product substitutes for the low-end product. In this paper, we construct profit model of downward substitution strategy and apply the optimal theory to compute the optimal order quantity and the maximal profit under this strategy in the first place, and then some relationships between product wholesale price, sale price, net salvage value and optimal order quantity are investigated. By analyzing the relationship between these different factors, we can obtain the compact of substitution strategy on product sale, which can provide management insight to real sale activity.