Strategic inventory in the presence of socially responsible dual distribution channels

Abstract

This paper examines how strategic inventory affects pricing decisions and contractual outcomes of a dual-channel supply chain with the consideration of corporate social responsibility. To highlight the role of CSR, we first extend the existing understanding of dual-channel supply chain dynamics to a for-profit dynamic setting. Thereafter, we analyze two cases where either the retailer or the supplier may be socially responsible. We find that although the presence of dual distribution arrangements can suppress retailer strategic inventory buildup, it may also lead to the retailer preferring the dynamic contract even for a sufficiently high holding cost, which is not the case in the single channel. We further show that the retailer’s strategic inventory decision is influenced by the level of social concern, supplier’s direct selling efficiency, and inventory holding cost. The retailer’s (supplier’s) social concern increases (decreases) the strategic inventory quantity, which significantly alters the contractual outcomes of the dual-channel supply chain. Interestingly, we find that although either channel member’s social concern or strategic inventory can alleviate double-marginalization effect, their interference may result in lower firm profit and supply chain inefficiency.