Service Failure Recovery and Prevention: Managing Stockouts in Distribution Channels

Marketing Science, 34:5, 2015

58 Pages Posted: 31 Dec 2016 Last revised: 3 Jan 2017

See all articles by Yan Dong

Yan Dong

University of South Carolina; University of Maryland - College Park

Kefeng Xu

University of Texas at San Antonio

Tony Haitao Cui

University of Minnesota - Twin Cities

Yuliang Oliver Yao

Lehigh University

Date Written: July 31, 2015

Abstract

In managing service failures such as stockouts, most research has emphasized preventive mechanisms, whereas stockout recovery mechanisms have been largely ignored. We propose and examine a failure-recovery mechanism (i.e., contractual stockout recovery) in the presence of demand uncertainty and compare it with failureprevention mechanisms in a dyadic distribution channel.

We find that stockout recovery mechanisms can improve channel profitability under certain conditions. More importantly, we find that stockout recovery may outperform stockout prevention mechanisms such as return policy and vendor managed inventory in improving manufacturer and channel profitability. This is because stockout recovery reduces channel-wide stockout risks and allows benefits from the reduced risks to be shared between the manufacturer and the retailer, helping alleviate double marginalization. Although return policy also reduces stockout risks, it does so by increasing inventory risks in the channel without reducing channel exposure to demand uncertainty. Thus, our research suggests that stockout recovery can be an effective alternative in managing stockouts to those common methods of stockout prevention mechanisms.

Keywords: service failure prevention and recovery, stockouts, distribution channel governance

Suggested Citation

Dong, Yan and Xu, Kefeng and Cui, Tony Haitao and Yao, Yuliang, Service Failure Recovery and Prevention: Managing Stockouts in Distribution Channels (July 31, 2015). Marketing Science, 34:5, 2015. Available at SSRN: https://ssrn.com/abstract=2743127

Yan Dong

University of South Carolina ( email )

701 Main Street
Columbia, SC 29208
United States

University of Maryland - College Park ( email )

College Park, MD 20742
United States

Kefeng Xu

University of Texas at San Antonio ( email )

San Antonio, TX 78249
United States

HOME PAGE: http://business.utsa.edu/faculty/kxu/

Tony Haitao Cui (Contact Author)

University of Minnesota - Twin Cities ( email )

321 19th Ave S
Suite 3-150
Minneapolis, MN 55455
United States

Yuliang Yao

Lehigh University ( email )

621 Taylor Street
Bethlehem, PA 18015
United States

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