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Strategic inventory in capacitated supply chain procurement

Author

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  • Pınar Keskinocak

    (Georgia Institute of Technology, Atlanta, GA, USA)

  • Kasarin Chivatxaranukul

    (Production and Supply Chain Management Limited, Samutprakarn, Thailand)

  • Paul M. Griffin

    (Georgia Institute of Technology, Atlanta, GA, USA)

Abstract

We study the strategic role of inventory in a sequential two-period procurement setting, where the supplier's capacity in the first period is limited and the retailer has the option to hold inventory. We compare the equilibrium under a dynamic contract, where the decisions are made at the beginning of each period, and a commitment contract, where the decisions for both periods are made at the beginning of the first period. We show that there is a critical capacity level below which the outcomes under both types of contracts are identical. When the first period capacity is above the critical level, the retailer holds inventory in equilibrium and the inventory is carried due to purely strategic reasons; as capacity increases, so does the strategic role of inventory. The supplier always prefers lower capacity than the retailer, and the difference between supplier-optimal and supply-chain optimal capacities, and the corresponding profits, can be significant. Finally, we find that the retailer's flexibility to hold inventory is not always good for the participants or for the channel. Copyright © 2008 John Wiley & Sons, Ltd.

Suggested Citation

  • Pınar Keskinocak & Kasarin Chivatxaranukul & Paul M. Griffin, 2008. "Strategic inventory in capacitated supply chain procurement," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 29(1), pages 23-36.
    • Handle: RePEc:wly:mgtdec:v:29:y:2008:i:1:p:23-36
    DOI: 10.1002/mde.1398
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    References listed on IDEAS

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    4. Saloner, Garth, 1986. "The role of obsolescence and inventory costs in providing commitment," International Journal of Industrial Organization, Elsevier, vol. 4(3), pages 333-345, September.
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    Cited by:

    1. Huiqi Guan & Haresh Gurnani & Xin Geng & Yadong Luo, 2019. "Strategic Inventory and Supplier Encroachment," Manufacturing & Service Operations Management, INFORMS, vol. 21(3), pages 536-555, July.
    2. Miao, Jie & Liu, Aijun & Wang, Ruiyao & Lu, Hui, 2022. "The influence of information asymmetry on the strategic inventory of deteriorating commodity," Omega, Elsevier, vol. 107(C).
    3. Nielsen, Izabela Ewa & Saha, Subrata, 2018. "Procurement planning in a multi-period supply chain: An epiphany," Operations Research Perspectives, Elsevier, vol. 5(C), pages 383-398.
    4. Jiahua Zhang & Lian Qi & Shilu Tong, 2021. "Dynamic Contract under Quick Response in a Supply Chain with Information Asymmetry," Production and Operations Management, Production and Operations Management Society, vol. 30(5), pages 1273-1289, May.
    5. Wang, Jiayun & Shum, Stephen & Feng, Gengzhong, 2022. "Supplier’s pricing strategy in the presence of consumer reviews," European Journal of Operational Research, Elsevier, vol. 296(2), pages 570-586.
    6. QU, Zhan & RAFF, Horst, 2023. "Two-part tariffs, inventory stockpiling, and the bullwhip effect," European Journal of Operational Research, Elsevier, vol. 308(1), pages 201-214.
    7. Imre Dobos & Gyöngyi Vörösmarty, 2021. "Green supplier selection using a common weights analysis of DEA and EOQ types of order allocation," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(3), pages 612-621, April.
    8. Saha, Subrata & Mantin, Benny & Majumder, Sani & Nielsen, Izabela, 2024. "On the interdependence of strategic inventories and new product generation introduction," International Journal of Production Economics, Elsevier, vol. 271(C).
    9. Joshua S. Gans, 2023. "Artificial intelligence adoption in a monopoly market," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(2), pages 1098-1106, March.
    10. Abhishek Roy & Stephen M. Gilbert & Guoming Lai, 2019. "The Implications of Visibility on the Use of Strategic Inventory in a Supply Chain," Management Science, INFORMS, vol. 65(4), pages 1752-1767, April.

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