TY - JOUR
T1 - The impact of supply disruption risk on a retailer's pricing and procurement strategies in the presence of a substitute product
AU - Gheibi, Shahryar
AU - Fay, Scott
N1 - Funding Information:
The authors appreciate constructive comments from Juanjuan Zhang and Charles Corbett on previous drafts of the manuscript. The second author acknowledges the financial support from the Earl V. Snyder Innovation Management Center, Whitman School of Management, Syracuse University.
Publisher Copyright:
© 2020 New York University
PY - 2021/9
Y1 - 2021/9
N2 - Retailers often experience stockouts when a supplier fails to deliver an order. In this paper, we identify the optimal procurement policy of a multi-product retailer in the presence of possible supply disruptions. Our analysis reveals that, in anticipation of potential supply disruptions, a retailer would typically benefit from ordering more units from a reliable supplier and fewer units from an unreliable one. Furthermore, the total number of units ordered may increase when there is supply disruption risk. As a result, the retailer may overstock some items. However, there are situations in which a retailer would optimally respond to supply uncertainty by consolidating its selling strategy around the unreliable supplier's product. Under such a strategy, we find the surprising result that the retailer reduces the amount it orders from a reliable supplier as an unreliable seller becomes even less reliable. We also explore how supply disruptions can affect a retailer's optimal pricing strategy. We find that under certain conditions, it is beneficial for a retailer to lower its price of a substitute product when one supplier fails to deliver its product. Finally, we find that, on net, consumers may benefit from supply uncertainty even though supply disruptions eliminate access to a desirable product.
AB - Retailers often experience stockouts when a supplier fails to deliver an order. In this paper, we identify the optimal procurement policy of a multi-product retailer in the presence of possible supply disruptions. Our analysis reveals that, in anticipation of potential supply disruptions, a retailer would typically benefit from ordering more units from a reliable supplier and fewer units from an unreliable one. Furthermore, the total number of units ordered may increase when there is supply disruption risk. As a result, the retailer may overstock some items. However, there are situations in which a retailer would optimally respond to supply uncertainty by consolidating its selling strategy around the unreliable supplier's product. Under such a strategy, we find the surprising result that the retailer reduces the amount it orders from a reliable supplier as an unreliable seller becomes even less reliable. We also explore how supply disruptions can affect a retailer's optimal pricing strategy. We find that under certain conditions, it is beneficial for a retailer to lower its price of a substitute product when one supplier fails to deliver its product. Finally, we find that, on net, consumers may benefit from supply uncertainty even though supply disruptions eliminate access to a desirable product.
KW - Pricing
KW - Procurement
KW - Product substitutability
KW - Supply disruption
KW - Supply uncertainty
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U2 - 10.1016/j.jretai.2020.11.005
DO - 10.1016/j.jretai.2020.11.005
M3 - Article
AN - SCOPUS:85097070612
SN - 0022-4359
VL - 97
SP - 359
EP - 376
JO - Journal of Retailing
JF - Journal of Retailing
IS - 3
ER -