Service Failure Recovery and Prevention: Managing Stockouts in Distribution Channels

Abstract

I n managing service failures such as stockouts, most research has emphasized preventive mechanisms, whereas stockout recovery mechanisms have been largely ignored. We propose and examine a failure-recovery mechanism (i.e., contractual stockout recovery) in the presence of demand uncertainty and compare it with failureprevention mechanisms in a dyadic distribution channel.We find that stockout recovery mechanisms can improve channel profitability under certain conditions. More importantly, we find that stockout recovery may outperform stockout prevention mechanisms such as return policy and vendor managed inventory in improving manufacturer and channel profitability. This is because stockout recovery reduces channel-wide stockout risks and allows benefits from the reduced risks to be shared between the manufacturer and the retailer, helping alleviate double marginalization. Although return policy also reduces stockout risks, it does so by increasing inventory risks in the channel without reducing channel exposure to demand uncertainty. Thus, our research suggests that stockout recovery can be an effective alternative in managing stockouts to those common methods of stockout prevention mechanisms.

Dynamic compensation and contingent sourcing strategies for supply disruption

“…In 2011, when HP and its partners failed to fulfil the orders of TouchPad in time, its retailers employed multiple forms of compensation to reduce the damage of the stock-out, including apologies, a free service for future deliveries, future discounts, etc. (Dong et al 2015). The provided compensation level (discount price) is commonly related to the length of the customers' waiting time.…”

Strategic rationing and freshness keeping of perishable products under transportation disruptions and demand learning

“…A fruitful of strategies have been proposed to hedge against supply-side disruptions, such as proactive strategies utilized before the occurrence of disruptions, reactive mitigation and recovery strategies to be implemented during and after disruption [16][17][18][19].…”

“…As indicated in Proposition 1, the optimal freshnesskeeping effort only occurs at the boundaries. The economic interpretation for the condition under which u * = 1 should be implemented (i.e., (16)) is as follows. It is preferable for the retailer to maintain all the products at the quality level "1" by inputting the maximum freshness-keeping effort during the entire transportation process, if the selling price of the fresh products is high, to be specific, exceeding a threshold…”

Dynamic sourcing strategies for supply disruptions under consumer stockpiling

“…To alleviate the negative impact caused by supply chain failures, a fruitful of tactics have been proposed, for instance, supplier diversification, contingent sourcing, inventory buffering, production scheduling and recovery, customer compensation, etc. [6][7][8][9][10]. The relevant literature mainly falls into two streams: contingent sourcing policy, and post-disruption demand identification considering stockpiling behavior.…”