Optimal Pricing and Advertisement Policy for an Advance Order Booking Inventory System with Order Cancellation under Inflationary Condition

Abstract

The e-commerce business has grown significantly over the past few years, mainly due to providing a better customer experience through advance booking and order cancellation options with a full refund. In this paper, the inventory control problem of a firm that offers advance booking for the product and cancellation (with a full refund) before the due delivery date is addressed. A profit maximization model is formulated to find the optimum inventory cycle length, the selling price of the product, and advertisement expenditure. The discounted cash flow approach is used to take into account cash flows at different time points. Advance booking is made at the beginning of the inventory cycle at a discounted price until the time of stock arrival, followed by usual spot sales. The number of order cancellations during the advance booking period is dependent on the waiting time for receiving the order. The impact of revenue collected through advance sales is considered by including interest earned. Product demand is assumed to be the function of advertisement expenditure and the selling price of the product. A solution procedure is suggested, and the model is illustrated through numerical analysis, thereby providing valuable managerial insights based on the results obtained.