What is Product Substitution

Perishability and substitutability are two key attributes that cannot be ignored in supply chain management. Once produced, perishable products have a finite shelf life. When expired, they are either partially or wholly value-less. The more time that perishable inventory is in storage, the less time it is available for sale to customers. Product substitution is a possibility when considering multiple products. Research indicates that an alternative product is willingly chosen by customers if the preferred one is out of stock. Managers must decide on the replenishment time and replenishment quantity for each item within product subcategory, to maximize expected profits under uncertain demand while minimizing the instances of running out of inventory (i.e., a ‘stock out'). The combination of these factors often requires simulation models to be developed to understand the behavior of the system as the parameters change. Simulation can incorporate stochasticity and complexity while providing detailed output for further analysis and optimization work.