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The Impact of Supplier Reliability on Retailer Demand

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Author Info

  • Nathan Charles Craig

    ()
    (Harvard Business School)

  • Nicole DeHoratius

    ()
    (University of Chicago)

  • Ananth Raman

    ()
    (Harvard Business School, Technology and Operations Management Unit)

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    Abstract

    To set inventory service levels, firms must understand how changes in service level affect customer demand. While the effects of service level changes have been studied empirically at the level of the end consumer, relatively little is known about the interaction between a retailer and a supplier. Using data from a manufacturer of branded apparel, we show increases in service level to be associated with statistically significant increases in retailer orders (i.e., demand, not just sales). Controlling for other factors that might affect demand, we find a 1 percent increase in historical service level to be associated with a 12 percent increase in demand from retailers, where historical service level is the type 1 service level performance of the apparel manufacturer over the prior year. Further, we find that retailers that order frequently exhibit a more substantial reaction to changes in service level, an outcome that is consistent with retailers learning about and reacting to changes in supplier service level. Our study not only provides the first empirical evidence of the impact of changes in service level on demand from retailers but also illustrates a method for estimating this relationship in practice.

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    File URL: http://www.hbs.edu/faculty/pages/download.aspx?name=11-034.pdf
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    Bibliographic Info

    Paper provided by Harvard Business School in its series Harvard Business School Working Papers with number 11-034.

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    Length: 34 pages
    Date of creation: Sep 2010
    Date of revision: Apr 2013
    Handle: RePEc:hbs:wpaper:11-034

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    1. James D. Dana, Jr. & Nicholas C. Petruzzi, 2001. "Note: The Newsvendor Model with Endogenous Demand," Management Science, INFORMS, vol. 47(11), pages 1488-1497, November.
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