The Impact of Supplier Inventory Service Level on Retailer Demand in the Supply Chain for Functional Apparel Items
Harvard Business School
University of Chicago - Booth School of Business
Harvard University - Technology & Operations Management Unit
August 12, 2014
Harvard Business School Technology & Operations Mgt. Unit Working Paper No. 11-034
To set inventory service levels, firms must understand how changes in inventory service level affect customer demand. While the effects of service level changes have been studied empirically at the level of the end consumer, relatively little is known about the interaction between a retailer and a supplier. Using data from a supplier of branded apparel, we show increases in inventory service level to be associated with statistically significant and substantial increases in retailer orders (i.e., demand, not just sales). Controlling for other factors that might affect demand, we find a 1 percent increase in historical inventory service level to be associated with a 13 percent increase in demand from retailers, where historical service level is the type 1 service level performance of the apparel manufacturer over the prior year. Further, retailers that order frequently exhibit a larger reaction to changes in service level, an outcome that is consistent with retailers learning about and reacting to changes in supplier inventory service level. Our study not only provides the first empirical evidence of the impact of changes in service level on demand from retailers but also illustrates a method for estimating this relationship in practice.
Number of Pages in PDF File: 34working papers series
Date posted: September 20, 2010 ; Last revised: August 14, 2014
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