Centralization of Stocks: Retailers vs. Manufacturer
AbstractA well-known result in inventory theory is that physical centralization of stocks in a system with multiple retailers decreases total costs and increases total profits for the retailers. However, does this centralization also benefit the manufacturer, whose goods the retailers stock, when customers unsatisfied at retailers due to stock-outs are considered lost sales? In this paper we consider a model with two retailers and one manufacturer. We then compare two systems: one in which the retailers hold stocks separately and the other in which they cooperate to centralize stocks at a single location. We show that whether or not centralization of stocks by retailers increases profits for the manufacturer depends on the level of "market search" in the supply chain. Market search is measured as the fraction of customers who, unsatisfied at their "local" retailer due to a stock-out, search for the good at the other retailer before leaving the system. Specifically, we show that there exists a threshold level for market search above which the manufacturer loses. Furthermore, for "very high" search levels, even the system profit (sum of manufacturer and retailer profits) may decrease upon centralization. We then compare the performance of the two systems under optimal pricing/subsidy mechanisms and show that often a manufacturer is better off in a decentralized system with high market search. We conclude with a discussion of the role of information systems in the decentralized systems.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by INFORMS in its journal Management Science.
Volume (Year): 45 (1999)
Issue (Month): 2 (February)
inventory; pooling; manufacturer; retailers; competition; cooperation; market search; information system;
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Özen, Ulaş & Sošić, Greys & Slikker, Marco, 2012. "A collaborative decentralized distribution system with demand forecast updates," European Journal of Operational Research, Elsevier, vol. 216(3), pages 573-583.
- Tang, Christopher S., 2006. "Perspectives in supply chain risk management," International Journal of Production Economics, Elsevier, vol. 103(2), pages 451-488, October.
- Chen, Chialin & Zhang, Jun & Delaurentis, Teresa, 2014. "Quality control in food supply chain management: An analytical model and case study of the adulterated milk incident in China," International Journal of Production Economics, Elsevier, vol. 152(C), pages 188-199.
- Leng, Mingming & Zhu, An, 2009. "Side-payment contracts in two-person nonzero-sum supply chain games: Review, discussion and applications," European Journal of Operational Research, Elsevier, vol. 196(2), pages 600-618, July.
- Chen, Jing, 2011. "Returns with wholesale-price-discount contract in a newsvendor problem," International Journal of Production Economics, Elsevier, vol. 130(1), pages 104-111, March.
- Yang, Hongsuk & Schrage, Linus, 2009. "Conditions that cause risk pooling to increase inventory," European Journal of Operational Research, Elsevier, vol. 192(3), pages 837-851, February.
- Andersson, Jonas & Melchiors, Philip, 2001. "A two-echelon inventory model with lost sales," International Journal of Production Economics, Elsevier, vol. 69(3), pages 307-315, February.
- Yue Dai & Shu-Cherng Fang & Xiaoli Ling & Henry Nuttle, 2008. "Risk pooling strategy in a multi-echelon supply chain with price-sensitive demand," Computational Statistics, Springer, vol. 67(3), pages 391-421, June.
- Shao, Xiao-Feng & Ji, Jian-Hua, 2009. "Effects of sourcing structure on performance in a multiple-product assemble-to-order supply chain," European Journal of Operational Research, Elsevier, vol. 192(3), pages 981-1000, February.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.