Retailer- vs. Vendor-managed inventory in the presence of consumer response to retail stockouts

Abstract

Mishra and Raghunathan (2004) and Kim (2008) conducted a study on the same model but reached conflicting results on under what circumstances vendor-managed inventory (VMI) benefits the retailer as opposed to retailer-managed inventory (RMI) in a setting where two products are partially substitutable. However, we note that their conflicting results were due to different assumptions about unmet demand after product substitution, which is influenced by consumers response to retail stockouts. This paper then extends their studies by incorporating consumer response to retail stockouts and re-examining the impacts of VMI on the retailer’s performance as well as on each manufacturer’s. Therefore, this paper reconciles the conflicts in the existing scholarly work and provides a more complete understanding of when each supply chain member is better off with VMI than RMI in a two-product setting. Additionally, the incorporation of consumer response to retail stockouts sheds light on how product substitution and consumers’ store loyalty affect the value of VMI to each supply chain member.

KEYWORDS:

• Vendor-managed inventory
• retailer-managed inventory
• product substitution
• consumers’ store loyalty
• manufacturer margin

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data availability statement

Data sharing is not applicable to this article as no new data was created or analyzed in this research.

Additional information

Notes on contributors

Jun Ru

Jun Ru received his doctoral degree in Management Science with a concentration on Operations Management from The University of Texas at Dallas in 2010. He is currently an assistant professor in the Monte Ahuja College of Business at Cleveland State University. His current research uses methodologies such as game theory, stochastic optimization, and econometric to study issues in the field of operations and supply chain (e.g. inventory control, supply chain contracting, bargaining power). He is also certified in production and inventory management (CPIM) by Association for Supply Chain Management.