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The Impact of Supplier Inventory Service Level on Retailer Demand

Author

Listed:
  • Nathan Craig

    (Fisher College of Business, Ohio State University, Columbus, Ohio 43210)

  • Nicole DeHoratius

    (Booth School of Business, University of Chicago, Chicago, Illinois 60637)

  • Ananth Raman

    (Harvard Business School, Boston, Massachusetts 02163)

Abstract

To set inventory service levels, suppliers must understand how changes in inventory service level affect demand. We build on prior research, which uses analytical models and laboratory experiments to study the impact of a supplier’s service level on demand from retailers, by testing this relationship in the field. We analyze a field experiment at the supplier Hugo Boss to determine how the supplier’s inventory service level affects demand from its retailer customers. We find increases in historical fill rate to be associated with statistically significant and managerially substantial increases in current retailer orders (i.e., demand, not just sales). Specifically, a one percentage point increase in fill rate, measured over the prior year, is associated with a statistically significant 11% increase in current retailer demand, controlling for other factors that might affect retailer demand. We explore the drivers of this demand increase, including changes in retailer assortment and order frequency. We discuss features of a retail buyer’s decision context identified through our field work that may explain the magnitude of the relationship we observe.

Suggested Citation

  • Nathan Craig & Nicole DeHoratius & Ananth Raman, 2016. "The Impact of Supplier Inventory Service Level on Retailer Demand," Manufacturing & Service Operations Management, INFORMS, vol. 18(4), pages 461-474, October.
    • Handle: RePEc:inm:ormsom:v:18:y:2016:i:4:p:461-474
    DOI: 10.1287/msom.2016.0582
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    References listed on IDEAS

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    6. Jiankun Sun & Dennis J. Zhang & Haoyuan Hu & Jan A. Van Mieghem, 2022. "Predicting Human Discretion to Adjust Algorithmic Prescription: A Large-Scale Field Experiment in Warehouse Operations," Management Science, INFORMS, vol. 68(2), pages 846-865, February.
    7. Gel, Esma S. & Salman, F. Sibel, 2022. "Dynamic ordering decisions with approximate learning of supply yield uncertainty," International Journal of Production Economics, Elsevier, vol. 243(C).
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