Product substitution refers to the use of product configuration Y to satisfy the demand for product configuration X when there is a stock-out for product configuration X in a multi-product configuration environment. Both product configuration X and Y are from the same product family where product configuration Y is higher in comparison to X. In this paper, a simulation model is developed for a two-stage supply chain for a multi-product configuration environment to study the impact of product substitution on supply chain performance along different dimensions and to determine the suitability of product substitution approach in a specific supply chain environment. Regression analysis is also carried out to establish the relationship between output parameters (i.e., total profit and product fill rate) and various input parameters. .

Product substitution is a technique used to reduce inventory and increase product availability in the supply chain. Product substitution is classified into two types, i.e., customer-driven and manufacturer-driven (Chopra and Meindl, 2007). In manufacturer- driven product substitution environment, the higher product configuration is given at a lower product configuration price, when the customer places order for the lower product but it is out of stock. By the process, the product availability is increased and it leads to enhanced customer satisfaction. One may find manufacturer-driven product substitution in semiconductor chips (Hsu and Bassok, 1999; and Gallego et al., 2006) as well as steel industries (Wagner and Whitin, 1958). But it is not limited to only these manufacturing supply chains.

Quite a few studies are also available on product substitution. Kraiselburd et al. (2004) considered a single-period supply chain, consisting of a manufacturer and a retailer, under three different scenarios (when the two firms are integrated into a single entity, when the retailer makes stocking decisions, and when the manufacturer makes stocking decisions) for a customer-driven product substitution environment. They concluded that vendor-managed inventory performs better when manufacturer’s effort is a substantial driver of consumer demand and when consumers are unlikely to substitute to another brand in the case of a stock-out. Hsu et al. (2005) studied two dynamic lot size problems with one-way product substitution. They found that in many real-world applications, the number of products that are hierarchically substitutable is typically small compared to the length of the planning horizon. Gallego et al. (2006) proposed a heuristic allocation scheme for determining near-optimal build plans where downward product substitution is adopted to satisfy unmet demand for lower grade products in a semiconductor production environment. Liu and Lee (2007) showed that unidirectional substitution improves various system performance measures such as the average inventory level, the average backlogged demand, and the fill rate through numerical studies. Ganesh et al. (2008) analyzed the impact of consumer product substitution on the value of information sharing in supply chains.

Supply Chain Management Journal, Analyzing, Product Substitution Approach, Two-Stage Supply Chain, Economic Order
Quantity (EOQ), Reorder Point (ROP).