Manufacturer-retailer Channel Research Articles

Manufacturer returns: An empirical study

Manufacturer returns, or buyback, have been increasingly observed in manufacturer-retailer channels. Using proprietary contract and sales data, this study empirically examines two key questions associated with buyback: (1) why does a manufacturer offer buyback to a retailer and (2) how are a manufacturer’s buyback decisions associated with its own and a downstream retailer’s marketing strategies? The existing research on the topic has been dominated by theoretical work. Instead, we use rich data to provide validations for the analytical models, as well as new insights above and beyond what is known from them. Our empirical findings suggest that buyback plays multiple critical roles simultaneously for a manufacturer, including risk-sharing role and informational role. Our results also show that whether a manufacturer offers buyback to the retailer is significantly associated with its own and the retailer’s pricing, promotion, and inventory decisions. Furthermore, the impacts vary across product categories that exhibit distinct characteristics.

Modelling cooperative advertising decisions in a manufacturer-distributor-retailer supply chain using game theory

This work considers cooperative advertising decisions in a manufacturer-distributor-retailer supply chain, where the manufacturer is taken as the Stackelberg leader, using differential game theory. The distributor and retailer are the first and the second followers, respectively. We introduce the distributor into the traditional manufacturer-retailer channel through his direct involvement in advertising as being incorporated into the non-stochastic Sethi's sales-advertising dynamics. This is used to model the awareness share dynamics in which the distributor and the retailer directly engage in advertising, while the manufacturer bypasses the distributor to subsidise only the retail advertising effort. We consider a subsidised and unsubsidised channel structures, where each structure results in a system of three nonlinear equations, which cannot be solved analytically, but only numerically. However, we show that the unique solution to each of the systems exists, provided certain conditions are satisfied. The distributor and the retailer's advertising strategies are developed for both when subsidy is provided and when it is not provided. We also obtain the manufacturer's subsidy rate and the market awareness share for both when retail advertising is subsidised and when it is not subsidised. We observe that with the provision of subsidy, the distributor reduces his advertising effort. However, the resulting increase in the retail advertising effort is larger than the reduction in the distributor's advertising commitment, thus making the channel advertising effort larger with subsidy. It further shows that to avoid being shortchanged, each player should adopt only his optimal strategy or strategies as the case may be.

Do cap-and-trade policies drive environmental and social goals in supply chains: Strategic decisions, collaboration, and contract choices

This paper studies a manufacturer-retailer channel selling complementary green products under the cap-and-trade policy and analyzes strategic decisions in these settings. While the manufacturer faces government mandated cap-and-trade norm, the retailer invests in corporate social responsibility through selling of green products. In this study, we conduct a comparative analysis of the players’ decisions under centralized and decentralized scenarios and explore the role of cap-and-trade policy in influencing decision outcomes. Further, three contracts are proposed to improve channel performance, namely, the two-part tariff, corporate social responsibility (CSR) effort sharing, and green cost sharing contracts. The results show that collaboration among the supply chain players through contracts supports green initiatives vis-à-vis the decentralized channel. However, given a choice of contracts, the channel prefers those contracts from which the manufacturer accrues direct benefits because he incurs greening costs. The results further demonstrate that carbon markets play an important role in influencing green initiatives, particularly, under high trading prices, where manufacturers are incentivized to improve their product offerings. Further, the cap-and-trade policy influences retailers to work toward building higher reputation and brand value through investments in higher CSR effort. From a retail price perspective, we find that consumers benefit under higher trading prices because the benefits of carbon surplus and higher revenues of the supply chain players result in lowering the prices for consumers. However, it is in contrast to studies on the decentralized channel outcomes or environmental taxation because in both the scenarios, greening or CSR costs get transferred to the consumers in the form of higher prices.

Strategic information management in a distribution channel

Two-way asymmetric information frequently hampers performances of manufacturer-retailer distribution channel members. Typically, the manufacturer is better informed about the quality of his product than the retailer while the latter knows more about her consumers’ preference for product quality than the manufacturer. Bridging these information gaps can enable more profitable channel (wholesale and retail) pricing decisions. Specifically, once the manufacturer knows his product quality, he can at some cost advertise it to the downstream retailer and her consumers. Similarly, the retailer can decide to conduct market research at some cost to more precisely determine her consumers’ preference for product quality and share her finding with the manufacturer. In this paper, the authors examine the strategic impacts of two alternative timings of these information gap-filling decisions: In the “Upfront Market Research” (UMR) scenario, the retailer moves first with her market research decision and then the manufacturer makes his product quality advertising decision. Alternatively, in the “Upfront Quality Advertising” (UQA) scenario, the manufacturer first decides about product quality advertising and then the retailer proceeds with her market research decision. This paper analytically investigates and compares the strategic impacts of the UMR and UQA scenarios on the firms’ equilibrium information strategies and payoffs in a two-way asymmetric information setting for the first time. The authors find that the retailer is always better off in the UQA than the UMR scenario while the manufacturer can find either UMR or UQA decision sequence more beneficial depending on the relative costs of market research and product quality advertising. The analyses offer new insights and guidelines for more efficient and profitable information acquisition and coordination in bilateral manufacturer-retailer channels.

The effect of governmental policies of carbon taxes and energy-saving subsidies on enterprise decisions in a two-echelon supply chain

Abstract Many countries have implemented carbon taxes to reduce carbon emissions, and provided subsidies for products that consume less energy. These governmental policies force manufacturing enterprises to emit less carbon during production and develop more energy-saving products. To examine how carbon taxes and energy-saving products subsidies affect enterprises' operational decisions, this study considers a manufacturer–retailer channel in which the manufacturer has the options to design a product to emit less carbon during production and use less energy when the product is consumed by customers. It is showed that governments’ energy-saving products subsidies stimulate reduction of carbon emissions and energy consumption, but this is not always true for carbon taxes, government should levy carbon taxes against manufacturers according to their pollution levels. Both carbon tax and subsidy policies can promote energy conservation and emission reduction if the initial carbon emission level of a manufacturer is low, but they have different promotional effects. Finally, in order to ensure the supply chain members cooperate and realise larger energy savings and emissions reductions, we propose a carbon-cost-sharing contract.

The Right to Return: An Empirical Study

This research investigates two key questions on manufacturer returns, or buy-back, in a manufacturer-retailer channel: (1) when should manufacturers offer buy-back to retailers and, (2) how manufacturers’ buy-back decisions influence their own- and the retailers’ marketing strategies. To do so, we first construct a decision process framework depicting the manufacturer and retailer in the manufacturer retailer channel, based upon which we generate a number of hypotheses regarding the antecedents and consequences of manufacturer returns. After that, we test the hypotheses using a system equation model proposed by Petersen and Kumar (2009). To ensure a robust conclusion, we conduct our empirical test on four diverse product categories sourced from a large retailer. Our empirical findings suggest that in reality, buy-back plays multiple critical roles for manufacturers, including risk-sharing, information sharing, and changing competition structure. Our results also show that the buy-back policy significantly affects the manufacturers’ and the retailer’s decisions on pricing and promotion. For example, in certain categories, buy-back helps prevent a manufacturer’s product from being discounted, suggesting that buy-back can serve as an alternative for resale price maintenance and channel coordination.

Advertising and price competition in a manufacturer-retailer channel

We investigate how manufacturers' advertising competition, when advertising has a dynamic impact on the goodwill that affects market demand, interacts with the price competition in a manufacturer-retailer channel. Specifically, we examine the strategic choices made by manufacturers, the role of the retailer in exacerbating or mitigating competition among manufacturers, the total channel profit and how that is split among the different players. Using prices, sales, and advertising data in the laundry detergent category we find that advertising and pricing are strategic complements as manufacturer advertising increases the price elasticity of demand; advertising competition intensifies price competition but it also improves the profitability of manufacturers; the presence of retailers in the channel leads to increased advertising spending while mitigating the extent of price competition. Manufacturers can enjoy a higher profit from using retailers when they compete in both price and advertising. Finally, we show that the emergence of ecommerce, which enables manufacturers directly selling to end consumers, has asymmetric profit impacts on manufacturers, as brands with lower cost and lower brand goodwill are more benefited from ecommerce.

Coordinate the Express Delivery Supply Chain with Option Contracts

In this paper, the authors study the capacity decision problem in an express delivery supply chain consisting of an online retailer and an express delivery provider where products sold by the online retailer are delivered by the express delivery provider to end customers. Unlike the case of the traditional manufacturer-retailer channels, the delivery capacity is a kind of “service product” that cannot be inventoried. To avoid the risk of unprofitable capacity, the delivery provider tends to build a limited delivery capacity which is smaller than the system-wide optimal capacity. To solve such a problem, the authors investigate the capacity coordination issue in this service supply chain using option contracts. By allowing the online retailer to reserve the capacity in advance, the delivery provider could rent a part of capacity which surpasses its self-owned capacity from a third party logistics. It is demonstrated that, compared with the benchmark based on a newsvendor model, option contracts can coordinate the delivery service supply chain. The authors also figure out the feasible option contracts that improve member's expected profit and show the degree of improvement that could be achieved.

Optimizing pricing, replenishment and rework decision for imperfect and deteriorating items in a manufacturer-retailer channel

In an imperfect manufacturing system, the production cost, inventory holding cost, and the performance of the supply chain are usually affected by imperfect items. Many studies focus on developing inspection and rework models for an imperfect manufacturing system, but few develop models for deteriorating items. The present study deals with the imperfect manufacturing system problem using the case of a two-echelon supply chain consisting of one manufacturer and one retailer. The non-cooperation and cooperation policies were used to investigate the combined effects of the pricing scheme, the replenishment program, imperfect quality, and the rework process for the deteriorating items. Several numerical studies have shown the effects of changing parameters on decision-making, and the sensitivity of profit improvement on the whole channel.

Implications for the Role of Retailers in Quality Assurance

We investigate a manufacturer–retailer channel to explore the role of a retailer in assuring the quality of a manufacturer's product as a quality gatekeeper. Such a gatekeeping activity can entail a reduction in the defective rate for consumers, if the retailer charges the manufacturer a penalty for each identified defect that is no smaller than the market penalty for an unidentified defect. As a result of the retailer's gatekeeping, the change in the negotiated wholesale price only depends on the manufacturer's individual benefit, whereas the change in the retailer's optimal retail price is associated with the channel‐wide benefit. When the impact of quality relative to retail price on demand is higher, the retailer benefits more from her gatekeeping activity, thus having a greater incentive to take on the quality gatekeeping responsibility. Moreover, the retailer's gatekeeping generates a larger increase in the demand as well as each firm's profit, when the retailer has a stronger relative bargaining power.

The impact of guanxi positioning on the quality of manufacturer–retailer channel relationships: Evidence from Taiwanese SMEs

Our study aims to provide and empirically test channel relationship positions based on the Chinese guanxi perspectives. By using cluster analysis and multivariate analysis of variance, we found 4 channel relationship position clusters, namely, instrumentality-based wai-ren (outsider/stranger), reciprocity-based shou-ren (acquaintance), obligation-based zi-ji-ren (insider), and resource-based zi-ji-ren, each of which revealed different channel relationship qualities. Respondents exhibited significantly higher interfirm trust and commitment toward obligation-based and resource-based zi-ji-ren partners. However, they also revealed the highest level of relationship risk perception toward obligation-based zi-ji-ren partners, whereas the highest level of relationship satisfaction was attributed to partners in the resource-based zi-ji-ren cluster. Our findings suggest ways to construct and consolidate interfirm relationship with partners in the guanxi network. Managers should consider the relationship risk caused by guanxi investments and should ensure a mutually trustworthy and satisfactory channel relationship through reciprocal ganqing and favor exchange with the leaders of counterparties.

An Empirically Derived Taxonomy of Manufacturer–Retailer Channel Structures

Despite efforts at channels theory integration, observers note that this literature lacks a systematic taxonomy of channel systems that reflects the literature's diversity. This study advances a framework that depicts channel structure as being composed of two dimensions: operational integration and joint decision-making. It also illustrates the sociopolitical, economic, and strategic antecedents to channel structure. Using finite mixture regression, differences in various types of manufacturer–retailer channel structure are explored. Based on this analysis, six classes of manufacturer–retailer channel structures are identified.

Advertising and Pricing Decisions in a Manufacturer-Retailer Channel with Demand and Cost Disruptions

This paper investigates advertising level, pricing and production quantity decision problems in a supply chain when demand and production cost disruptions occur simultaneously. The supply chain consists of one manufacturer and one retailer where customer demand depends on the retail price and advertisement expenditure. The authors examine this problem in two game-theoretic models: a cooperative game and a non-cooperative Stackelberg-manufacturer game, respectively. Propositions and insights are developed from the analysis of these models. The original production plan has some robustness in face of the disruptions of demand and production cost in both cooperative and non-cooperative models. Only when the disruptions exceed some thresholds will the channel members take an overall adjustment. In addition, the cooperative channel achieves higher channel profits and higher social surplus than the non-cooperative model by using a lower retail price and a higher level of advertising efforts to promote demand.

Optimal lot-sizing integration policy under learning and rework effects in a manufacturer–retailer chain

Most research in economic manufacturing/order quantity management assumes that all products are of perfect quality and are produced at a constant production rate. One result of this assumption is that the number of units produced in a given period is constant, which is not the case in real life. Most production systems produce items which are of perfect quality along with some that are of imperfect quality. Defective items, as well as the learning effect, affect production and inventory costs, thereby shaping the performance of the manufacturer–retailer chain. The present study uses the Nash, Stackelberg, and cooperation games to model an imperfect production system to investigate the combined effects of lot-sizing size integration, the learning effect, imperfect production, and the rework process on a manufacturer–retailer channel. This study also demonstrates the optimal properties of the proposed models, develops a search algorithm for obtaining optimal solutions, and conducts a numerical study to seek structural and quantitative insights into the structure of the proposed models. In addition it analyzes the sensitivity of the solutions in relation to the major parameters.

Trade Promotion Decisions Under Demand Uncertainty: A Market Experiment Approach

In this paper, we examine trade promotion decisions in manufacturer–retailer channels where retailers face consumer demand uncertainty. We first present the theoretical analysis for two types of markets where trade promotion discounts are offered either as off-invoices or as scan-backs. We derive propositions by comparing wholesale and retail prices, retailer order quantities, and profits given the same trade promotion discount. Next, we extend the basic model so that the amount of trade promotion discount influences market expansion and solve for the optimal discount level. To test our theory, we then employ market experiments where we manipulate demand uncertainty and market expansion. Consistent with our theoretical predictions, we find that wholesale and retail prices are higher and retailer order quantities lower when the same amount of trade promotion discount is allocated to scan-backs versus off-invoices. In the market expansion condition, we find that manufacturers offer deeper discounts when trade promotions are allocated to off-invoices versus scan-backs. Overall, our research suggests that market experiments can shed light on trade promotion outcomes for which industry data are sparse or nonexistent. This paper was accepted by Teck Ho, behavioral economics.

Effects of Lot-Sizing Integration and Learning Effect on Managing Imperfect Items in a Manufacturer-Retailer Chain

An optimal supply chain performance requires the execution of a precise set of actions, including coordination of the movement of materials, products, and information flows among suppliers, manufacturers, distributors, retailers, and customers. However, a supply chain usually involves several members who are primarily concerned with optimizing their own objectives. This self-serving focus often results in poor channel performance. The present study used the Nash game and the cooperation game in an imperfect production system to investigate the combined effects of lot-sizing integration, learning effect, and an imperfect production process on a manufacturer-retailer channel. This paper also developed a search procedure to solve the problem described, and the optimal properties and a numerical study were conducted to seek structural and quantitative insights into the relationship between the upstream and downstream entities of the supply chain. Numerical results indicated that the cooperation game policy created a higher cost reduction under a wide range of parameter settings.

Coordination via cost and revenue sharing in manufacturer–retailer channels

The problem of establishing efficiency in a manufacturer–retailer channel (channel coordination) is extensively discussed in the industrial economics, the marketing and the operations research literature. However, studies considering consumer demand to be simultaneously affected by price and non-price variables are scarce. One subset of models investigates efficient contracts with non-linear tariffs, but requires mechanisms which are rarely observed in managerial practice. The other subset analyses channel efficiency effects of alternative royalty payments, but omits to design an efficient contract. We contribute to this literature by investigating a contract of royalty payments that is sufficient for channel coordination. Based on the analysis of the underlying vertical externalities, we show that channel coordination requires cost and revenue sharing via a revenue sharing rate and marketing effort participation rates on both manufacturer and retailer level. Some surprising findings are highlighted: there exists a continuum of efficient contracts. Efficiency requires a retailer’s participation of at least 50% in the manufacturer’s cost of marketing effort. Moreover, the elimination of double marginalisation is not necessary for channel coordination. Manufacturer and retailer can choose an efficient contract via bargaining over the wholesale price. The main challenge for managers will be to create acceptance of new types of royalty payments based on a trustful manufacturer–retailer relationship. We also discuss the cases of the Apple iPhone market launch and of innovative restaurant franchising to further illustrate and underline the relevance of our results.

Channel incentives in sharing new product demand information and robust contracts

Demand for a new product is often highly uncertain. As the developer of a new product, the manufacturer may reduce the uncertainty of the product’s demand through observing progress in his product development process or receiving demand signals directly from customers. This paper first shows that a centralized channel always benefits from improved demand information. Yet, to realize this benefit in a decentralized manufacturer–retailer channel, the manufacturer needs to disclose his private demand information to the retailer. We show that the manufacturer’s incentive to share his improved demand information depends on the supply contract signed with the retailer. Furthermore, mandating the manufacturer to disclose his improved demand information can actually reduce the total channel profit. We provide managerial insights by analyzing three widely used contract forms. We investigate whether these contracts are robust under an unanticipated demand information update observed by the manufacturer. We show that the quantity flexibility contract with a high return rate is not robust. The buyback contract, however, is robust and always achieves information sharing while preserving channel performance.

The optimal ordering and advertising policy for a single-period commodity in a supply chain

The objective of this study is to investigate the combined effects of the advertising mechanism, return policy, and channel coordination for a manufacturer–retailer channel. In order to maximize the profit of the supply chain in a single selling period, the retailer uses the advertising mechanism to stimulate the customer to buy finished items, and the manufacturer urges the retailer to stock more items by providing the return policy. Under the above-mentioned settings, non-cooperative and cooperative policies are formulated to offer structural and quantitative insights into the interplay between the proposed models. In addition, a profit-sharing mechanism based on channel rebates for achieving a win–win relationship of the channel members is proposed.

Integrating Production Costs in Channel Decisions

Production costs are critical in every business. In this research, we explore how variations in the manufacturer's production cost affect both the manufacturer–retailer channel relationship and the manufacturer's and the retailer's choice of a price-setting rule (e.g., a dollar-amount margin or a percentage-based margin). We employ a multidisciplinary approach that combines executive interviews, survey research, and a game-theoretic analytical model. The analytical model shows that both the manufacturer's and the retailer's price-setting rule influences the other party's approach to production cost. Therefore, the manufacturer's and the retailer's optimal choice of a price-setting rule is not invariant, as previous marketing literature has suggested; such choices depend on the shape of the production cost function. Overall, the results offer new insight into the channel outcomes in light of production costs. The empirical results support the analytical results.