Journal Article

Inventory Dynamics and Supply Chain Coordination

Krishnan, Harish, Winter, Ralph A

2010

Overview

This paper extends the theory of supply chain incentive contracts from the static newsvendor framework of the existing literature to the simplest dynamic setting. A manufacturer distributes a product through retailers who compete on both price and fill rates. We show that inventory durability is the key factor in determining the underlying nature of incentive distortions and their contractual resolutions. When the product is highly perishable, retailers are biased toward excessive price competition and inadequate inventories. Vertical price floors or inventory buybacks (subsidies for unsold inventory) can coordinate incentives in both pricing and inventory decisions. When the product is less perishable, the distortion is reversed and vertical price ceilings or inventory penalties can coordinate incentives.

• Publisher: INFORMS,Institute for Operations Research and the Management Sciences
• Subject: Analysis / Applied sciences / Channel coordination / Competition / Contract incentives / Contract management / Contracts / Coordination / Customer relations / Distortion / Economic aspects / Economic competition / Economic dynamics / Economic incentives / Economic models / Equations / Exact sciences and technology / Incentives / Incentives (Business) / Inventories / Inventory / Inventory control / Inventory control, production control. Distribution / Inventory data / inventory dynamics / Logistics / Management / Operational research and scientific management / Operational research. Management science / Penalties / Perishables / price and inventory competition / Price ceilings / Prices / Prices and rates / Pricing policies / Retail outlets / Retail stores / Studies / Subsidies / Supply / supply chain coordination / Supply chain management / Supply chains / Wholesale prices