The Impact of Supplier Inventory Service Level on Retailer Demand

35 Pages Posted: 20 Sep 2010 Last revised: 14 Jan 2016

Nathan Craig

Ohio State University (OSU) - Fisher College of Business

Nicole DeHoratius

University of Chicago - Booth School of Business

Ananth Raman

Harvard University - Technology & Operations Management Unit

Date Written: January 5, 2016

Abstract

To set inventory service levels, suppliers must understand how changes in inventory service level affect demand. We build on prior research, which uses analytical models and laboratory experiments to study the impact of a supplier's service level on demand from retailers, by testing this relationship in the field. We analyze a field experiment at the supplier Hugo Boss to deter- mine how the supplier's inventory service level affects demand from its retailer customers. We find increases in historical fill rate to be associated with statistically significant and managerially substantial increases in current retailer orders (i.e., demand, not just sales). Specifically, a one percentage point increase in fill rate, measured over the prior year, is associated with a statistically significant 11% increase in current retailer demand, controlling for other factors that might affect retailer demand. We explore the drivers of this demand increase, including changes in retailer assortment and order frequency. We discuss features of a retail buyer's decision context identified through our field work that may explain the magnitude of the relationship we observe.

Suggested Citation

Craig, Nathan and DeHoratius, Nicole and Raman, Ananth, The Impact of Supplier Inventory Service Level on Retailer Demand (January 5, 2016). Harvard Business School Technology & Operations Mgt. Unit Working Paper No. 11-034. Available at SSRN: https://ssrn.com/abstract=1679792 or http://dx.doi.org/10.2139/ssrn.1679792

Nathan Craig

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Nicole DeHoratius

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Ananth Raman (Contact Author)

Harvard University - Technology & Operations Management Unit ( email )

Boston, MA 02163
United States
617-495-6937 (Phone)
617-496-4059 (Fax)

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