Optimal inventory decisions when offering layaway

Abstract

This paper presents an inventory management policy for a retailer offering a layaway program. Layaway is a service provided by retailers that allows budget constrained consumers who have sufficiently high valuations to pay for a product in several installments rather than at once and obtain the product that has been reserved for them at the end of the payment period. If a consumer defaults on payments, then the reserved item is released back into store inventory. In this paper, we first determine the retailer's optimal order decisions when layaway is offered. We find that the order quantity under a layaway program decreases with the likelihood of consumers not finishing their layaway plans and that it is not always profitable for a retailer to offer a layaway program. We then identify the market conditions under which the retailer would benefit from a layaway program. Lastly, we consider an extension to capture the influence of the timing of consumer defaults.

Optimal inventory decisions for a risk-averse retailer when offering layaway

“…Although we are studying a new model characterized by retailers offering a layaway program, the setup of our model is similar to minimization of CVaR in the newsvendor problem under stochastic demand and a risk-averse retailer. Using the only paper in the operations management literature to explicitly consider retailer inventory decisions when offering layaway (Dimitrov and Ceryan, 2018), our modeling and solution approaches are inspired by studies in two research streams. The first stream is single period stochastic inventory decisions.…”

“…In the version of the newsvendor we consider, we include budget constraints on consumers. To our knowledge, is not common to have budgetconstrained consumers (Dimitrov and Ceryan (2018) considered consumer budget constraints) and instead budget constraints are usually associated with the newsvendor (Moon and Silver, 2000, Niederhoff, 2007, Shi and Zhang, 2010, Vairaktarakis, 2000, Zhang, 2010.…”

“…In addition to accounting for a risk-averse retailer, we also account for the same retailer offering a layaway program. As there is only one study that considers a layaway program (Dimitrov and Ceryan, 2018), we now review recent work on the risk-averse newsvendor. Eeckhoudt et al (1995) find the optimal order quantity of a risk-averse newsvendor.…”

“…Retail stores report that layaway programs play a significant role in holiday sales, which accounts for 40% or more of their annual sales; especially in recent years, the economic dilemmas in the United States make it difficult for consumers to bear large purchase costs (Casteele, 2017). Even though layaway is a large opportunity that retailers leverage, there are very few studies that consider the impact of offering layaway on a retailer's inventory decisions, we are only aware of Dimitrov and Ceryan (2018).…”

“…For example, if a consumer defaults on an item, then the retailer loses the opportunity to sell this item at full price to another consumer between the time the item was initially put on layaway and the time the consumer defaults. Dimitrov and Ceryan (2018) consider only risk-neutral retailers and use the expected profit function to determine the optimal order quantity for the retailer. However, empirical studies on newsvendor order quantities find that managers order quantities different than those determined via risk-neutral newsvendor models (Fisher and Raman, 1996, Kahn, 1992, Schweitzer and Cachon, 2000.…”