The Effect of Supply Reliability in a Retail Setting with Joint Marketing and Inventory Decisions

This paper studies the impact of supply reliability on a retail firm's performance under joint marketing and inventory decisions. The firm sells a product in a single selling season and can exert marketing effort to influence consumer demand. We develop a modeling framework to quantify the value of improving supply reliability and investigate how this value depends on different model parameters. The results in this paper provide useful insights into how firms should make investment decisions on new technologies to improve supply reliability. First, we establish a necessary and sufficient condition under which the maximum unit cost a firm is willing to pay to improve supply reliability increases in product price. It has been found that this condition would hold in most practical situations. Thus, with some caveats, our result supports the intuition that a firm is willing to pay more to improve supply reliability for products with a higher price. Next we show that with the same product price, a firm is willing to pay more to improve supply reliability for products with a higher product cost. This implies that it is not necessarily true that emerging technologies for improving supply reliability should be first adopted for products with the highest unit contribution margin. Finally, we show that a product with a lower marketing cost function always benefits more than a product with a higher marketing cost function. This finding suggests that the priority of adopting new technologies should be given to situations where the firm can effectively induce greater demand through promotional effort