Retailer Inventory Sharing in Two-Tier Supply Chains: An Experimental Investigation

• Published in: Management science Vol. 68; no. 12; pp. 8773 - 8790
• Main Authors: Davis, Andrew M., Huang, Rihuan, Thomas, Douglas J.
• Format: Journal Article
• Language: English
• Published: Linthicum INFORMS 01-12-2022; Institute for Operations Research and the Management Sciences
• Subjects: behavioral operations; Centralization; Decentralization; Inventory; Inventory management; inventory sharing; Market prices; Profits; Retail stores; Retailing industry; risk pooling; Supply; Supply & demand; supply chain contracting; Supply chains; Transfer pricing
• ISSN: 0025-1909; 1526-5501
• DOI: 10.1287/mnsc.2022.4323

When multiple retailers hold inventory to satisfy random demand, retailer inventory-sharing strategies can potentially reduce the supply-demand mismatch and increase overall supply chain performance. In this paper, we experimentally investigate alternative inventory-sharing strategies in a two-tier supply chain with an upstream manufacturer and two downstream retailers. In one setting, retailers act as if they are centralized and use a single quantity to fulfill joint demand. In the other, retailers are decentralized and face separate demands, but they can transfer inventory after demands are realized. In this latter decentralized scenario, we also consider whether the manufacturer or retailers have decision authority over the inventory transfer price. One key result is that when the retailers are decentralized and the manufacturer sets the transfer price, both retailers and the manufacturer earn higher profits than in the centralized retailer strategy, which runs counter to theory. We also find that when retailers are decentralized and set their own transfer price, the most equitable distribution of profits is achieved. In an effort to account for these results, we find that a model of fairness captures decisions well. Overall, by investigating how different inventory-sharing strategies affect the distribution of profits in a two-tier supply chain, our results provide guidance to firms considering how, if at all, they should enter such arrangements.
This paper was accepted by Jay Swaminathan, operations management.
Funding:
The authors acknowledge financial support from Cornell University and the University of Virginia.
Supplemental Material:
The data files and electronic companion are available at
https://doi.org/10.1287/mnsc.2022.4323
.