Strategic inventory and supplier encroachment under asymmetric information

Abstract

The existing literature has shown that using a strategic inventory strategy and supplier encroachment strategy exclusively or simultaneously may improve the efficiency of the supply chain. However, most research assumes that the demand information in the supply chain is symmetric. In real life, the retailer often has private demand information, and thus the demand information is asymmetric. The role of an information sharing strategy in the presence of strategic inventory and supplier encroachment has yet to be studied. The gap is filled by considering a two-period model consisting of a supplier and a retailer, for which information sharing, strategic inventory, and supplier encroachment are investigated with a focus on the effect of strategic inventory strategy on information sharing strategy, encroachment strategy, and the profit of supply chain members. We significantly contributed by considering the interaction between the retailer's strategic inventory strategy, information sharing strategy, and the supplier's encroachment strategy. Asymmetric information is first introduced in the strategic inventory model. Furthermore, our other significant contribution is presented to demonstrate that strategic inventory can hurt all firms when the demand information is asymmetric, which is different from the setting of perfect information. The following results are obtained. First, holding strategic inventory will not affect the retailer's information sharing strategy. Second, the use of strategic inventory by the retailer will restrain the use of encroachment strategy by the supplier, whether the information is shared or not. Finally, when the demand information is asymmetric, and the supplier does not encroach in the second period, the retailer can use strategic inventory to bring about 'lose-lose' or 'win-lose' outcomes besides 'win-win' or 'lose-win' outcomes.