Supplier Encroachment under Asymmetric Information

When formal distribution channels are absent in developing countries, micro‐retailers travel a long distance to replenish their stocks directly from suppliers. This “informal” replenishment strategy is inefficient due to high imputed travel costs involved in the replenishment process. To improve efficiency, one “hybrid” replenishment strategy has emerged under which one of the micro‐retailers in a neighborhood, while continuing its own retail business, also operates as a wholesaler to serve other micro‐retailers in the neighborhood. A major obstacle for the transition from the informal strategy to the hybrid strategy is that the micro‐retailers are reluctant to source from a wholesaler who also competes with them in the retail market. Thus, it is not clear when the micro‐retailers adopt the hybrid strategy instead of the informal strategy. Meanwhile, the micro‐retailers may prefer the “formal” strategy: a traditional replenishment strategy under which one of the micro‐retailers relinquishes its retail business and operates purely as a wholesaler. We examine a situation when competing micro‐retailers contemplate with the three potential aforementioned replenishment strategies. Our equilibrium analysis of the two‐store model reveals that the dominant strategy is: (a) the hybrid strategy when the travel cost is high; (b) the formal strategy when the travel cost is medium; and (c) the informal strategy when the travel cost is low. This key insight is shown continue to hold when we extend the two‐store model to incorporate other issues including: quantity discounts from the supplier, variable operating costs, price competition, local monopolies, and different decision sequences. One additional finding is that the transition from the informal strategy to the hybrid strategy could benefit consumers if the micro‐retailers receive quantity discounts from the supplier. Furthermore, when there are more than two stores, we show that the formal strategy is never dominant. Moreover, when the number of stores increases, the hybrid strategy becomes more preferable to the informal strategy.

Section: Related Literaturementioning

confidence: 99%

Section: Three Replenishment Strategies: Two-store Model and Equilibrmentioning

confidence: 99%

Replenishment Strategies for Micro‐Retailers in Developing Countries

Tang

Zhou

2017

“…Any selfish cost-reducing investments made by the manufacturer could also spill over to reduce the wholesale price paid by the retailer (Yoon 2016). However, manufacturer's encroachment in retail can lead to loss of profit for both parties, if the retailer's selling process is more efficient and the prior probability of a large market is low (Li et al 2014).…”

Section: Literature Reviewmentioning

confidence: 99%

End‐To‐End Supply Chain Strategies: A Parametric Study of the Apparel Industry

Phadnis¹,

Fine

2017

This study examines the tradeoffs in sourcing and sales strategies (i.e., upstream and downstream supply chain strategies) by considering them as components of an integral end‐to‐end supply chain strategy. We evaluate four end‐to‐end supply chain strategies under various scenarios using a newsvendor model, and compare the model's predictions against the prescriptions in Fisher's () framework, which recommends “cost‐efficient” supply chains for “functional” products and “responsive” supply chains for “innovative” products. We considered combinations of offshore vs. nearshore sourcing, and online vs. brick‐and‐mortar retailing. This study's key finding is that sourcing and sales strategies are not completely modular: an integral end‐to‐end strategy may not decompose into an optimal sourcing strategy and a separately computed optimal sales strategy. Our analyses sharpen strategic supply chain thinking by identifying realistic conditions in which an end‐to‐end strategy with cost‐efficient components could outperform one with responsive components for innovative products, or when one with responsive components could be more profitable than one with cost‐efficient components for functional products.

“…On the other hand, a single manufacturer may sell its product through not only independent retailers but also its own stores, leading to a dual channel structure. Consequently, competition can arise between the independent retailer and the manufacturer-owned store, a phenomenon often referred to as "supplier encroachment" (Arya et al 2007, Li et al 2014, Wang et al 2009). Arya et al (2007) show that while introducing competition between the supplier and the retailer, supplier encroachment can mitigate double marginalization and thus benefit both sides, if the retailer is more efficient in the retail process.…”

Section: Literature Reviewmentioning

confidence: 99%

What Happens When Manufacturers Perform The Retailing Functions?

Chan

Lewis

2016

This study examines the effects of a relatively new channel structure on prices and sales in a large department store, which in recent years has switched the management of many of its product categories from a traditional retailer‐managed system to a manufacturer‐managed system. We find that the change caused overall retail prices to decrease. However, there was significant heterogeneity in the response across brands. In the cell phone category, brands with high market shares and inelastic demand did not change prices. In the watch category, the retail prices of relatively low‐end brands decreased while the prices of premium brands increased substantially after the switch. In addition to sales increases due to lower prices, we find that the channel structure change further caused sales to increase by 9–10% in the cell phone category and by 11–17% in the watch category. These results are consistent with previous theoretical predictions. We believe that our results provide important academic and managerial implications due to the increasing prevalence of manufacturer‐managed systems in the retail industry.