Study On Strategic Inventory Considering Sales Effort, Competitive Environment And Quality Improvement

In practice, for strategic consideration, many retailers purchase a large amount of goods in advance, which results in inventory. The impact of the strategic inventory on all supply chain members is different, which largely influences the bargaining power between supply chain members. To stimulate demand, more and more firms use various kinds of promotion in addition to price. Promotions are initiated either by the supplier, e.g., the national brand advertising, or by the retailer, e.g., free delivery service. The strategy regarding strategic inventory, purchasing and marketing is different under different promotion mode. With the rapid development of economy, channel competition has become increasingly fierce. There is not only competition between retailers, but also in the case when one supplier establishes its own direct channel to compete with its retailer. For instance, Xiaomi and Zara owns its direct channel as well as the retail outlet. Competitive environment may have great impact on the purchasing and strategic inventory policy of the supply chain members. To save maintenance cost, suppliers are becoming more aware of products’quality improvement. The purchasing, marketing and strategic inventory decisions of the retailer may largely affect the supplier’s product quality improvement effort.Motivated by this background, we first study the impact of the different promotion mode on the strategic inventory when demand is influenced by both price and sales effort. Second, we analyze the impact of competition between two retailers and between the retailer and the supplier’s direct channel on the strategic inventory. Further, we analyze the effect of carrying strategic inventory on the profits of the supply chain and its members. Finally, we take the product quality defect and the supplier’s quality improvement effort into consideration, and analyze the preference for strategic inventory of the supply chain members when the repairing cost is different. The main findings in this paper are as follows:(1) When the supplier invests in sales effort, the sales quantity will increase whereas the strategic inventory will decrease. However, when the retailer invests in sales effort, both the sales quantity and the strategic inventory will increase. Supplier will always invest more in the first period than the second period, because she has an incentive to balance the ordering quantities of the retailer in the two periods in order to increase its bargaining power, in addition to stimulate demand and increase sales quantity. When the supplier invests in sales effort, the retail price is always higher in the first period than the second period. When the retailer invests in sales effort, the retail price is higher in the first period than the second period if the investment efficiency is low, otherwise, the retail price in the first period is lower than that in the second period. The supplier’s profit is higher under supplier promotion mode, whereas the retailer’s profit is higher under retailer promotion mode. The supply chain’s profit is higher under retailer promotion mode than supplier promotion mode.(2) As the competition between retailers become more fierce, the retailers’profit will decrease while the supplier’s profit will increase, and the strategic inventory will decrease, which further enhances the supplier’s bargaining power. Relative to the case without strategic inventory, the intensity of competition has a greater impact on the retailers’profit in the case with strategic inventory. This is exactly opposite for the supplier. When the retailer holds strategic inventory, supplier will always benefit from establishing a direct channel. Whether the retailer will benefit from supplier’s encroachment depends on the inventory holding cost, market size and the direct sales cost of the supplier. When the supplier establishes a direct channel, whether the retailer will benefit from holding strategic inventory depends on the holding cost and the supplier’s direct sales cost.(3) The supplier’s quality improvement effort is greatly influenced by the strategic inventory and repairing cost. First, when the repairing cost is relatively small, the supply chain and its members will benefit from strategic inventory. Second, when the repairing cost is somewhere in the middle, carrying strategic inventory will produce adverse effect on the supply chain and its members. Finally, when the repairing cost is relatively high, carrying strategic inventory will motivate the supplier to invest more in quality improvement. As a result, the profit of the supply chain and its members will increase.