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The Impact of Supplier Inventory Service Level on Retailer Demand

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  • Nathan Charles Craig

    () (Harvard Business School)

  • Nicole DeHoratius

    () (University of Chicago)

  • Ananth Raman

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

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 deter- mine 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 Charles Craig & Nicole DeHoratius & Ananth Raman, 2010. "The Impact of Supplier Inventory Service Level on Retailer Demand," Harvard Business School Working Papers 11-034, Harvard Business School, revised Jan 2016.
  • 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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