Managing strategic inventories under investment in process improvement

Abstract

In supplier-retailer interactions, the retailer may carry inventories strategically as a bargaining mechanism to induce the supplier to drop the future wholesale price. As per Anand et al. (2008), the introduction of strategic inventories always benefits the supplier and possibly also the retailer if the holding cost is sufficiently low (due to the contract-space-expansion effect). Is such a move beneficial for the supply chain agents in the presence of process improvement efforts? Such efforts-initiated by suppliers-ultimately reduce production cost and may translate into lower wholesale prices as well as lower consumer prices. We find that strategic inventories may stimulate investment in process improvement when the holding cost is high (as it encourages the supplier to further reduce future cost to eliminate the need for strategic inventories), but may suppress such investment when the holding cost is low (as strategic inventories are cheap to stock and hence cannot be eliminated). Our key result, contrary to the existing literature, is that strategic inventories may be harmful to both supply chain agents in the presence of process improvement. In that case, the supplier effectively over-invests in process improvement efforts, inducing the retailer to reduce the stock of strategic inventories, while reversing the benefits of the contract-space-expansion effect. We also consider variations to the model, whereby the supplier may delay his investment decision, the holding cost may be a function of the wholesale price set by the supplier, consumers may behave strategically, and the planning horizon may consist of multiple periods.

The interplay between strategic inventories and cost misreporting in supply chains

“…Mantin and Jiang (2017) found that the retailer holdings of strategic inventories under a dynamic contract are limited due to quality deterioration. Mantin and Veldman (2019) later studied the performance of strategic inventories under supplier's process improvement efforts. Some scholars have verified the role of strategic inventory in a competitive environment.…”

Strategic Inventory Management of Deteriorating Products with Demand Disruptions

“…The results demonstrated that the retailer’s strategic inventories were not always a threat, and could even be useful. Mantin and Veldman [ 17 ] investigated the issue of strategic inventories in presence of process improvement efforts. They demonstrated that strategic inventories could be harmful for the supplier and the retailer under such conditions.…”

Group Buying of Competing Retailers with Strategic Inventory

“…Roy et al [41] investigate the implication of a lack of observability on the use of strategic inventory in a supply chain consisting of a retailer and a manufacturer. Mantin and Veldman [42] show that strategic inventory may be harmful to supply chain agents in the presence of process improvement. Wang et al [43] investigate the impact of competition and strategic inventory on the performance of a supply chain including two competing suppliers and one retailer.…”