Strategic Inventories under Supply Chain Competition
Operations Research and Operations Management
Xi Li, Yanzhi David Li, Chen Ying-Ju
Manufacturing and Service Operations Management, forthcoming
Despite widespread take up of just-in-time inventory management systems, from time to time retailers still carry inventories. The classical reasons for this include uncertain supply and demand, capacity constraints, long lead times and fixed procurement costs. In addition, retailers also carry inventories for strategic reasons: with inventory on hand, a retailer can induce its supplier to cut down wholesale prices, thereby making a greater profit. Moreover, researchers have found that, in addition to benefiting retailers, strategic inventories also improve the suppliers’ profit as well as consumer surplus, thereby leading to a “win-win-win” scenario.
A recent study by Xi Li, Yanzhi Li, both from the City University of Hong Kong and Ying-Ju Chen from the Hong Kong University of Science and Technology challenges this view. Instead of considering strategic inventories in a monopoly market, they investigate the role of strategic inventories under supply chain competition.
“Supply chain competition is prevalent in this modern economy”, say the authors.
“A canonical example of this can be seen when competing car manufacturers distribute their cars through exclusive dealers. Another example is the relationship between electronics manufacturers and exclusive distributors/retailers. Customers frequently purchase through Panasonic shops and Samsung shops that operate independently from the original manufacturers.”
The authors find that, under supply chain competition, strategic inventories have an additional effect of intensifying marketing competition, which can backfire on both the manufacturers’ and retailers’ profits.
So, what should firms do? The answer hinges on the intensity of market competition. When market competition is less fierce, retailers should carry strategic inventories and benefit from them. When market competition is fierce, however, retailers should avoid carrying strategic inventories.
“Firms may want to eliminate strategic inventories through, for example, implementing a vender-managed inventory (VMI) system or adopting drop shipping,” the authors say.
Overall, this research cautions firm managers that the conventional wisdom on strategic inventory may not always hold, and that they should carefully evaluate the competition intensification effect of strategic inventories.
