The Effect of Supply Reliability in a Retail Setting with Joint Marketing and Inventory Decisions

Abstract

T his paper studies the impact of supply reliability on a retail firm's performance under joint marketing and inventory decisions. The firm sells a product in a single selling season and can exert marketing effort to influence consumer demand. We develop a modeling framework to quantify the value of improving supply reliability and investigate how this value depends on different model parameters. Our results provide useful insights into how firms should make investment decisions on adopting new technologies to improve supply reliability. First, we establish a necessary and sufficient condition under which the maximum unit cost a firm is willing to pay to improve supply reliability increases in product price. We further show that this condition would hold in most practical situations. Thus, with some caveats, our result supports the intuition that a firm is willing to pay more to improve supply reliability for products with a higher price. Next, we show that for two products with the same price, a firm is willing to pay more to improve supply reliability for the product with a higher product cost. This implies that it is not necessarily true that emerging technologies for improving supply reliability should be first adopted for products with the highest unit contribution margin. Finally, we show that a product with a lower marketing cost function always benefits more from improved supply reliability than a product with a higher marketing cost function. This finding suggests that the priority of adopting new technologies should be given to situations where the firm can effectively induce greater demand through promotional effort.

Evaluation of cycle-count policies for supply chains with inventory inaccuracy and implications on RFID investments

“…Lee and Yano (1988) study a multi-stage model for a single production run to meet a single-period demand. Liu et al (2008) consider the impact of supply reliability on inventory and pricing decisions. On a related topic, Bollapragada et al (2004) consider assembly systems with random capacity at each location that are controlled with base-stock policies.…”

Dynamic pricing in the newsvendor problem with yield risks

“…They also compared the certain and uncertain yield cases and illustrated that certain yield situation brings better system performance. Liu et al (2010) present another related study in which demand is manipulated and determined as a result of marketing effort, whereas product price is fixed. Not surprisingly, when marketing effort is high, demand increases and it further increases the profit.…”

Mitigating the Impact of Disruptions in Supply Chains

“…Liu et al [41] considered how supply reliability influences the performance of a retail firm under joint marketing and inventory decisions. They investigated the value of higher supply reliability and showed that the optimal stocking quantity does not necessarily increase or decrease as risk is reduced due to the improvement of supply reliability.…”

“…Carrying enough inventory to protect against a disruption that could last weeks or even months is completely antithetical to the lean strategies pursued by firms in many industries. Moreover, studies have shown that if the premium cost of using a reliable supplier is comparable with the cost of holding inventory against supply disruptions, it is preferable to make use of reliable suppliers [41]. The reason is that lowered inventory levels reveal problems more quickly and hence are conducive to problem resolution and process improvement.…”