The manufacturer's response to stock-outs in a single manufacturer-retailer channel

Product unavailability is a common problem in supply chains with stochastic end-consumer demand and the impact of stock-outs extends beyond the short term to also affect long-term profits. Furthermore, the long-term stock-out effect for the manufacturer is not necessarily the same as the long-term stock-out effect for the retailer owing to brand substitution by the retailer in the event of a stock-out. In this paper, we incorporate the long-term stock-out effects on the manufacturer's profit in a single manufacturer-retailer distribution channel. We study the merits of the manufacturer's response to these effects via an incentives campaign targeting the consumers who experience stock-outs. Our findings show that the manufacturer reduces the wholesale price and the retailer responds by stocking a larger quantity, resulting in fewer stock-outs in the channel. Our model can serve as a building block to study the long-term stock-out effects in more complex supply chain structures.