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Designing Supply Chain Backorder Contracts for Customer Retention

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  • Yan Dong

    (University of Maryland)

  • Yuliang Yao

    (Lehigh University)

  • Kefeng Xu

    (The University of Texas at San Antonio)

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    Abstract

    Stockout is an unfortunate event for businesses. While prior literature has focused on how to prevent stockouts from occurring, we study how supply chain firms can best react to them by converting a potential lost sale or customer into a retained backorder or customer when they do happen. In particular, we examine how an upstream supply chain firm may use an incentive contract with a downstream firm in an inventory system managed by either the downstream or upstream firm to retain customers in Business-to-Business markets. The upstream firm promises the downstream firm a certain level of compensation ex ante in exchange for efforts by the retailer to convert potential lost sales, due to stockouts, to backorders. The findings show that the inclusion of a backorder incentive contract may change firms’ decision patterns. Significant differences between who manages the inventory in terms of inventory levels, prices to induce retailer backorder efforts, supply chain profits, and their sensitivity to factors such as long-term customer value, are explored and discussed. A contingent effort cost is also considered and the results are presented.

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    File URL: http://business.utsa.edu/wps/MSS/0038MSS-068-2008.pdf
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    Bibliographic Info

    Paper provided by College of Business, University of Texas at San Antonio in its series Working Papers with number 0038.

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    Length: 37 pages
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    Handle: RePEc:tsa:wpaper:0038

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    Related research

    Keywords: Vendor Managed Inventory; Retailer Managed Inventory; Business-to-Business Market; Incentive; Backorders; Customer Retention.;

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    1. David Kaplan, 2004. "Manufacturing in South Africa over the last decade: a review of industrial performance and policy," Development Southern Africa, Taylor & Francis Journals, vol. 21(4), pages 623-644.
    2. Simon Roberts & John Thoburn, 2003. "Adjusting to Trade Liberalisation: The Case of Firms in the South African Textile Sector," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 12(1), pages 74-103, March.
    3. Tybout, James R. & Westbrook, M. Daniel, 1995. "Trade liberalization and the dimensions of efficiency change in Mexican manufacturing industries," Journal of International Economics, Elsevier, vol. 39(1-2), pages 53-78, August.
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    11. Aaditya Mattoo & Devesh Roy & Arvind Subramanian, 2003. "The Africa Growth and Opportunity Act and its Rules of Origin: Generosity Undermined?," The World Economy, Wiley Blackwell, vol. 26(6), pages 829-851, 06.
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