When is Vendor Managed Inventory Good for the Retailer? Impact of Relative Margins and Substitution Rates

56 Pages Posted: 20 Sep 2007

See all articles by Santiago Kraiselburd

Santiago Kraiselburd

MIT Zaragoza International Logistics Program; INCAE Business School

Date Written: February 23, 2006

Abstract

When customers cannot find a particular item at a retailer because it is out of stock, they are likely, with some probability, to switch to a substitute product from another manufacturer at the same store. Analyzing a two-product full substitution case, this paper examines two beliefs argued in the literature: (1) that, under Vendor Managed Inventory (VMI), the retailers would benefit because manufacturers would increase stocking quantities to avoid losing sales to a competitor and (2) that substitution benefits retailers who make a sale regardless. We find that the first proposition, while appealing, is simply not true for many cases. We also find that the second proposition does not hold for a wide number of cases. We contribute to the understanding of the inherent tradeoffs involved in deciding to use RMI or VMI in the presence of competing, substitute products.

Keywords: Newsvendor, substitution, Vendor Managed Inventory, retailer margin, manufacturer margin

JEL Classification: L82, D24, L23

Suggested Citation

Kraiselburd, Santiago, When is Vendor Managed Inventory Good for the Retailer? Impact of Relative Margins and Substitution Rates (February 23, 2006). Instituto de Empresa Business School Working Paper No. WP06-18, Available at SSRN: https://ssrn.com/abstract=1015571 or http://dx.doi.org/10.2139/ssrn.1015571

Santiago Kraiselburd (Contact Author)

MIT Zaragoza International Logistics Program ( email )

Avenida Gomez Laguna 25
Zaragoza, 50009
Spain

INCAE Business School

Alajuela
Costa Rica

HOME PAGE: http://www.incae.edu

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