Managing strategic inventories in a three-echelon supply chain of durable goods

Abstract

Firms can hold strategic inventory to bargain with their suppliers about wholesale prices. In this paper, we model a three-echelon durable goods supply chain consisting of a supplier, a wholesaler, and a retailer, where the latter two firms can choose to hold strategic inventory. Our major findings are as follows. First, contrary to the literature, our study shows that the retailer's use of strategic inventory benefits all supply chain members, irrespective of whether the wholesaler holds strategic inventory. Second, the strategic inventories of the wholesaler and the retailer suppress each other when the holding cost is low. Otherwise, the retail strategic inventory can stimulate the wholesale strategic inventory. Third, after the retailer employs strategic inventory, introducing wholesale strategic inventory will harm each supply chain member. However, after the wholesaler employs strategic inventory, introducing retail strategic inventory can benefit all members. For the entire supply chain, holding strategic inventory exclusively at the retailer is optimal. Fourth, when product durability is high, the supplier may suffer from the wholesaler's strategic inventory. Additionally, the retailer's strategic inventory can solve the time inconsistency problem associated with durable goods. Finally, we extend our main model to consider multiple retailers and different holding costs. Our analysis confirms the robustness of our major findings and managerial insights.