Competition and Contracting in Supply Chains

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Modern supply chains are no longer vertically integrated enterprises, centrally managed by one decision maker, but a collection of independent and highly specialized businesses with their own profit objectives often at odds with those of the other partners in the supply chain. Large retailers play a central role and have a significant influence on the overall supply chain. They stock variety of competing and substitutable products, similar in their utility to the consumer. They have also introduced their own store brands, at the expense of national brands, sold at a lower price and a higher profit, e.g., Loblaw's and President's Choice. One of the ongoing challenges businesses have in relation to consumers, is the variability in demand for products. 70% of stockouts are attributed to retail operations resulting in endless and expensive cycles of misallocation of inventory, operational disruptions as well as higher prices for the consumer due to increased cost. Increased competition is forcing retailers to focus on achieving overall cost reductions from all operations including those of third parties. In literature, supply chains are studied from the viewpoint of a profit-maximizing supplier who seeks to extract rent from retailers through appropriate contracting; however, few have analyzed the prominent role of large retailers offering store brands in this context. Impact of vendor or retail managed inventory systems, pricing, bargaining power, retailer's willingness to offer a competing store brand and level of vertical integration all influence the contracting negotiations between suppliers and retailers. These contracts can be mathematically and analytically evaluated and optimized. Such analysis will help design better supply chain contracts between suppliers and retailers; provide decision making framework for managers in terms of pricing, inventory, risk control and assortment of product offerings, resulting in lower costs for the business and lower prices for the consumers, who according to StatsCan, spent $37 Billion dollars on retail sales in May alone. The proposed research program will involve training of four HQPs over the duration of the grant.