Integrated Profitability Evaluation for a Newsboy-Type Product in Own Brand Manufacturers

Abstract

Effective inventory management depends on accurate estimates of product profitability to formulate ordering and manufacturing strategies. The achievable capacity index (ACI) is a simple yet efficient approach to measuring the profitability of newsboy-type products with normally distributed demand, wherein profitability is presented as the probability of achieving the target profit under the optimal ordering quantity. Unfortunately, the ACI is applicable only to retail stores with a single demand. In the current study, we addressed the issue of measuring the integrated profitability of newsboy-type products sold in multiple locations with independent demand levels, such as own-branding-and-manufacture (OBM) companies with multiple owned channels. We began by formulating profitability in accordance with multiple independent normal demands, and then developed an integrated ACI (IACI) to simplify expression. We also derived the statistical properties of the unbiased estimator to determine the true IACI in situations where demand patterns are unknown. Finally, we conducted hypothesis testing to determine whether the integrated profitability meets a stipulated minimum level. For convenience, we tabulated the critical values as a function of sample size, confidence level, the number of channels, and the stipulated minimum level. One can make decisions simply by estimating the IACI based on historical demand data from all channels and then looking up the critical value in the corresponding tables. Consequently, the proposed methods make it possible for OBM managers to address integrated profitability evaluation, which is effective in deciding the optimal timing to pull unprofitable items from the shelves by looking up generic tables. Furthermore, we also performed numerical and sensitivity analyses for a real-world case to illustrate the applicability and some managerial implications of the proposed scheme.