The Impact of Supplier Inventory Service Level on Retailer Demand

Abstract

To set inventory service levels, suppliers must understand how changes in inventory service level affect demand. We build on prior research, which uses analytical models and laboratory experiments to study the impact of a supplier's service level on demand from retailers, by testing this relationship in the field. We analyze a field experiment at the supplier Hugo Boss to determine how the supplier's inventory service level affects demand from its retailer customers. We find increases in historical fill rate to be associated with statistically significant and managerially substantial increases in current retailer orders (i.e., demand, not just sales). Specifically, a one percentage point increase in fill rate, measured over the prior year, is associated with a statistically significant 11 % increase in current retailer demand, controlling for other factors that might affect retailer demand. We explore the drivers of this demand increase, including changes in retailer assortment and order frequency. We discuss features of a retail buyer's decision context identified through our field work that may explain the magnitude of the relationship we observe.

The Future of Retail Operations

“…Empirical methods use real data from a retail context and document insights important for retailers that could be the basis for future modeling efforts. Some papers use publicly available information (Chen et al 2007, Kesavan and Mani 2013, Kesavan et al 2016 whereas others build on proprietary data from a particular retailer (Perdikaki et al 2012, Craig et al 2016. In some cases, the empirical model is validated by a field experiment (Gallino and Moreno 2018).…”

Ralph Gomory Best Industry Studies Paper Award (2016)

“…As recipients of the 2016 Ralph Gomory Best Paper Award of the Industry Studies Association (ISA), we have been given the opportunity to share the background of our paper, "The Impact of Supplier Inventory Service Level on Retailer Demand" (Craig et al 2016). Our objective is to highlight the role of industry partnerships in academic research.…”

Mobile Money: The Effect of Service Quality and Competition on Demand

“…However, Anderson et al (2006) do not account for competition among firms, nor do they account for geographic variation in the firm's customer base (such as population density and socio-economic status) as we do. Using a branded apparel context, Craig et al (2014) study supplier-retailer relationships. They find that higher supplier service levels have a large effect on suppliers' demand from retailers when supplier service levels are already high: a 1% increase in historical supplier service level is associated with a 13% increase in demand from retailers.…”