Centralization of Stocks: Retailers vs. Manufacturer

Abstract

A well-known result in inventory theory is that physical centralization of stocks in a system with multiple retailers decreases total costs and increases total profits for the retailers. However, does this centralization also benefit the manufacturer, whose goods the retailers stock, when customers unsatisfied at retailers due to stock-outs are considered lost sales? In this paper we consider a model with two retailers and one manufacturer. We then compare two systems: one in which the retailers hold stocks separately and the other in which they cooperate to centralize stocks at a single location. We show that whether or not centralization of stocks by retailers increases profits for the manufacturer depends on the level of "market search" in the supply chain. Market search is measured as the fraction of customers who, unsatisfied at their "local" retailer due to a stock-out, search for the good at the other retailer before leaving the system. Specifically, we show that there exists a threshold level for market search above which the manufacturer loses. Furthermore, for "very high" search levels, even the system profit (sum of manufacturer and retailer profits) may decrease upon centralization. We then compare the performance of the two systems under optimal pricing/subsidy mechanisms and show that often a manufacturer is better off in a decentralized system with high market search. We conclude with a discussion of the role of information systems in the decentralized systems.inventory, pooling, manufacturer, retailers, competition, cooperation, market search, information system

Inventory competition and incentives to back-order

“…Karjalainen [13], Lippman and McCardle [18], Mahajan and van Ryzin [19,20], Netessine and Rudi [24] and Netessine and Zhang [25] further study this problem for an arbitrary number of retailers. Anupindi and Bassok [3], Avsar and Baykal-Gursoy [4] and Nagarajan and Rajagopalan [23] analyze the impact of substitution in a multi-period setting with lost sales. To the best of our knowledge, this line of research has thus far been constrained within the single-period framework (or a multi-period framework with an assumption of lost sales), where the modeling of demand backlogging is not an issue and hence di®ers from our multiple-period problem.…”

“…To the best of our knowledge, this line of research has thus far been constrained within the single-period framework (or a multi-period framework with an assumption of lost sales), where the modeling of demand backlogging is not an issue and hence di®ers from our multiple-period problem. Papers by Parlar [26], Wang and Parlar [34], Karjalainen [13], Netessine and Rudi [24] and Anupindi and Bassok [3] model customer switching behavior similarly to our Model I, where we assume that there is no back-ordering. Lippman and McCardle [18] have a more general model with several rules for allocating demand to competing retailers.…”

Economic and Environmental Performance of Fashion Supply Chain: The Joint Effect of Power Structure and Sustainable Investment

“…The manufacturer Stackelberg game has been widely considered in the literature (Shi et al [30]). For example, Anupindi and Bassok [31], Lariviere and Porteus [32], Dong and Rudi [33], and Taylor [34] used manufacturer Stackelberg games to study the interaction of supply chain members. The interaction has also been modeled as Vertical Nash game, in which both supply chain members make their decisions simultaneously.…”

Capacity Allocation Using Past Sales: When to Turn-and-Earn

“…In our setting, the supplier holds her wholesale price constant even when capacity is scarce, which is frequently observed in the automobile industry. There are several papers that consider the allocation of inventory among retailers in both competitive and cooperative settings, but all assume infinite supplier capacity (e.g., Anupindi and Bassok 1998;Deneckere et al 1996;Hartman and Dror 1996;Lippman and McCardle 1997).…”