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Effect of Supply Reliability in a Retail Setting with Joint Marketing and Inventory Decisions

Antai College of Economics and Management, Shanghai Jiao Tong University, Shanghai 200052, China
Paul Merage School of Business, University of California, Irvine, California 92697
Olin Business School, Washington University in St. Louis, St. Louis, Missouri 63130
liusx{at}sjtu.edu.cn
rso{at}uci.edu
fzhang22{at}wustl.edu

This paper studies the impact of supply reliability on a retail firm's performance under joint marketing and inventory decisions. The firm sells a product in a single selling season and can exert marketing effort to influence consumer demand. We develop a modeling framework to quantify the value of improving supply reliability and investigate how this value depends on different model parameters. Our results provide useful insights into how firms should make investment decisions on adopting new technologies to improve supply reliability. First, we establish a necessary and sufficient condition under which the maximum unit cost a firm is willing to pay to improve supply reliability increases in product price. We further show that this condition would hold in most practical situations. Thus, with some caveats, our result supports the intuition that a firm is willing to pay more to improve supply reliability for products with a higher price. Next, we show that for two products with the same price, a firm is willing to pay more to improve supply reliability for the product with a higher product cost. This implies that it is not necessarily true that emerging technologies for improving supply reliability should be first adopted for products with the highest unit contribution margin. Finally, we show that a product with a lower marketing cost function always benefits more from improved supply reliability than a product with a higher marketing cost function. This finding suggests that the priority of adopting new technologies should be given to situations where the firm can effectively induce greater demand through promotional effort.

Key Words: supply uncertainty; inventory; marketing and operations interface; information technology; stochastic orderings
History: Received: March 15, 2007; accepted: October 17, 2008.