IESE Research Papers
No D/722:
The impact of quick response in inventory-based competition
Felipe Caro and Victor Martinez de Albeniz ()
Abstract: We propose a multi-period extension of the competitive
newsvendor model of Lippman and McCardle (1997) to investigate the impact
of quick response under competition. For this purpose, we consider two
retailers that compete in terms of inventory: customers that face a
stockout at their first-choice store will look for the product at the other
store. Consequently, the total demand that each retailer faces depends on
the competitor's inventory level. We allow for asymmetric reordering
capabilities, and we are particularly interested in the case when one of
the firms has a lower ordering cost but can only produce at the beginning
of the selling season, whereas the second firm has higher costs but can
replenish stock in a quick response manner taking advantage of any
incremental knowledge about demand (if it is available). We visualize this
problem as the competition between a traditional make-to-stock retailer
that builds up inventory before the season starts versus a retailer with a
responsive supply chain that can react to early demand information. We
provide conditions for this game to have a unique pure-strategy
subgame-perfect equilibrium, which then allows us to perform numerical
comparative statics. Our results confirm in a competitive setting the
intuitive fact that quick response is more beneficial when demand
uncertainty is higher, or exhibits a higher correlation over time. Finally,
we find that part of the competitive advantage from quick response arises
from the asymmetry in response capabilities.
Keywords: quick response; fast fashion; inventory competition; (follow links to similar papers)
53 pages, November 21, 2007
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