Multi-Period Inventory Coordination in Franchise Networks: the Necessity of Trading Platform and Franchisor Involvement

Abstract

The cloud-based OneView Inventory Management (OVIM) platform offers retail franchise companies a competitive edge and disrupts the operations of every party in their networks. In this platform, designed and operated by the brand (franchisor), every retailer (franchisee) can frequently access to all brand inventory virtually as they trade (buy or sell) inventory with each other and the brand, rather than traditionally procure from the brand. This paper studies whether and how the brand should craft the trade rules for such frequent inventory-trading to achieve the coordination (maximize the profit of the entire network). We find that the coordination can be achieved via (1) the use of the coordinating trade prices (CTPs) and (2) shipping cost being split between the buyer and the seller in any proportion. The CTPs we characterize are the same regardless of the source of inventory, state-dependent, and may include a trading-reward to prevent retailers from strategically holding more or less inventory than the system-optimal in the previous period to “manipulate” the trade price. The good news is that these CTPs are quite intuitive (market-clearing) and can be easily calculated and automated into the OVIM platform ex ante. Technically, we are the first to model these multi-period trading as Nash dynamic games between the retailers and prove that the coordination can be achieved under the unique equilibrium. We also provide practical insights that the coordination requires both the existence of the inventory trading platform like the OVIM and the brand’s proactive involvement as the trade rule-maker and market-maker of the platform.