An Optimistic-Robust Approach for Dynamic Positioning of Omnichannel Inventories
This addresses inventory management for omnichannel retailers, offering a novel alternative to traditional robust optimization.
The paper tackles the problem of allocating inventory across retail channels to meet uncertain omnichannel demand by introducing a bimodal inventory optimization strategy that balances worst-case robustness with average-case performance. Using real-world data, it shows BIO outperforms pure robust optimization by 27% in average profitability and other baselines by over 10%.
We introduce a new class of data-driven and distribution-free optimistic-robust bimodal inventory optimization (BIO) strategy to effectively allocate inventory across a retail chain to meet time-varying, uncertain omnichannel demand. The bimodal nature of BIO stems from its ability to balance downside risk, as in traditional Robust Optimization (RO), which focuses on worst-case adversarial demand, with upside potential to enhance average-case performance. This enables BIO to remain as resilient as RO while capturing benefits that would otherwise be lost due to endogenous outliers. Omnichannel inventory planning provides a suitable problem setting for analyzing the effectiveness of BIO's bimodal strategy in managing the tradeoff between lost sales at stores and cross-channel e-commerce fulfillment costs, factors that are inherently asymmetric due to channel-specific behaviors. We provide structural insights about the BIO solution and how it can be tuned to achieve a preferred tradeoff between robustness and the average-case performance. Using a real-world dataset from a large American omnichannel retail chain, a business value assessment during a peak period indicates that BIO outperforms pure RO by 27% in terms of realized average profitability and surpasses other competitive baselines under imperfect distributional information by over 10%. This demonstrates that BIO provides a novel, data-driven, and distribution-free alternative to traditional RO that achieves strong average performance while carefully balancing robustness.