Management of Inventory Replenishment and Available Offerings for Goods Sold with Optional Value-Added Packages

In the competitive retail industry many retailers employ the strategy of bundling goods they merchandize with optional value-added packages to enhance the attraction of the goods and increase the revenue. The package offerings can vary with the inventory level of the goods. Offering such packages impacts upon the sales of the goods, and hence, affects inventory management of the goods. In this paper we propose a model to analyze the optimal choice of package offerings and the optimal management of the goods inventory for a single type of goods. We define a procedure to construct superior offerings which are shown to contain the optimal package offerings for all inventory levels of the goods. After obtaining structural properties of the superior offerings and applying an existent result, we deduce that the optimal inventory management policy is of the reorder-point, order-up-to-level, or (s, S), type and the optimal choice of the package offerings at any given inventory level of the goods is one of the superior offerings. We further show that, when the market is separated into independent segments, each segment can be treated independently for the purpose of selecting the optimal offerings. Numerical examples show that the optimal dynamic choice of the package offerings can substantially improve profitability over the policy of offering the same packages all of the time.