The Effect of Inventory Risk on Supply Chain Performance

Abstract

In this analysis we experimentally investigate how altering the inventory risk in a two-tier supply chain affects both the total supply chain profits and the distribution of profits between the two parties. We evaluate three wholesale-price contracts, each differing in which party incurs the risk associated with unsold inventory; a Push contract where the retailer incurs the risk, a Pull contract where the supplier incurs the risk, and an Advance-Purchase Discount (APD) contract where both parties share the risk. Our primary results are that total supply chain profits increase when switching from the Push contract to the Pull contract, as theory suggests, but that there is no improvement in supply chain profits when moving from the Pull contract to the APD contract. We also find that, contrary to standard theory, the APD contract is superior to the Push contract in terms of both retailer and supplier profits, suggesting that a Push contract should never be considered when an APD contract is a possibility.