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Strategic inventory in capacitated supply chain procurement

Listed author(s):
  • Pınar Keskinocak

    (Georgia Institute of Technology, Atlanta, GA, USA)

  • Kasarin Chivatxaranukul

    (Production and Supply Chain Management Limited, Samutprakarn, Thailand)

  • Paul M. Griffin

    (Georgia Institute of Technology, Atlanta, GA, USA)

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    We study the strategic role of inventory in a sequential two-period procurement setting, where the supplier's capacity in the first period is limited and the retailer has the option to hold inventory. We compare the equilibrium under a dynamic contract, where the decisions are made at the beginning of each period, and a commitment contract, where the decisions for both periods are made at the beginning of the first period. We show that there is a critical capacity level below which the outcomes under both types of contracts are identical. When the first period capacity is above the critical level, the retailer holds inventory in equilibrium and the inventory is carried due to purely strategic reasons; as capacity increases, so does the strategic role of inventory. The supplier always prefers lower capacity than the retailer, and the difference between supplier-optimal and supply-chain optimal capacities, and the corresponding profits, can be significant. Finally, we find that the retailer's flexibility to hold inventory is not always good for the participants or for the channel. Copyright © 2008 John Wiley & Sons, Ltd.

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    Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

    Volume (Year): 29 (2008)
    Issue (Month): 1 ()
    Pages: 23-36

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    Handle: RePEc:wly:mgtdec:v:29:y:2008:i:1:p:23-36
    DOI: 10.1002/mde.1398
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    1. repec:exe:wpaper:00/17 is not listed on IDEAS
    2. Mollgaard, H.P. & Poddar, S. & Sasaki, D., 2000. "Strategic Inventories in Two-period Oligopoly," Discussion Papers 0017, Exeter University, Department of Economics.
    3. Julio J. Rotemberg & Garth Saloner, 1989. "The Cyclical Behavior of Strategic Inventories," The Quarterly Journal of Economics, Oxford University Press, vol. 104(1), pages 73-97.
    4. Saloner, Garth, 1986. "The role of obsolescence and inventory costs in providing commitment," International Journal of Industrial Organization, Elsevier, vol. 4(3), pages 333-345, September.
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