Summary
We address the value of information and value of centralized control in the context of a two-echelon, serial supply chain with one retailer and one supplier that provide a single perishable product to consumers. Our analysis is relevant for managing slow-moving perishable products with fixed lot sizes and expiration dates of a week or less. We evaluate two supply chain structures. In the first structure, referred to as decentralized information sharing, the retailer shares its demand, inventory, and ordering policy with the supplier, yet both facilities make their own profit-maximizing replenishment decisions. In the second structure, centralized control, incentives are aligned and the replenishment decisions are coordinated. The latter supply chain structure corresponds to the industry practices of company-owned stores or vendor-managed inventory. We measure the value of information and value of centralized control as the marginal improvement in expected profits that a supply chain achieves relative to the case when no information is shared and decision making is decentralized. Key assumptions of our model include stochastic demand, lost sales, and fixed order quantities. We establish the importance of information sharing and centralized control in the supply chain and identify conditions under which benefits are realized. As opposed to previous work on the value of information, the major benefit in our setting is driven by the supplier's ability to provide the retailer with fresher product. By isolating the benefit by firm, we show that sharing information is not always Pareto-improving for both supply chain partners in the decentralized setting.
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Extract
Managing Slow-Moving Perishables in the Grocery Industry
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1. IntroductionWe place our research in the context of the grocery industry and, more specifically, in the area of managing perishables. The quality, variety, and availability of perishables have become an order-winning criteria of consumers, representing the primary reasons why many consumers choose one supermarket over another (Tortola 2005, Axtman 2006). In turn, retailers have responded by dramatically increasing the number of stock-keeping units (SKUs) they offer for sale (Tortola 2005, Boyer 2006). In some categories, such as produce, the average number of items stocked has doubledin the past five years, and the trendis expectedto continue (Axtman 2006).From an operational perspective, the growth in perishables creates additional challenges for retailers. Increasing product variety creates a larger assortment over which demand is spread, contributes to an increasing number of slow-moving perishables, and increases product spoilage (Boyer 2006). Spoilage is a significant component of total store shrink, with current estimates indicating that shrink costs an average supermarket approximately US$450,000 per year. Although perishables departments account for only 30% of total store sales, they contribute 56% to total store shrink (National Supermarket Research Group 2003). Moreover, the amount of shrink in perishables departments has consistently increased over the past six years (Tortola 2005). From this perspective, the link between variety and spoilage is readily apparent. There is generally a minority of products in an assortment that are high volume and account for the majority of sales, which leaves a preponderance of low-volume products accounting for a small percentage of sales. Some retailers report that as much as 75% of their SKUs are slow moving (Småros et al. 2004). Our own analysis of item movement at a division of...See the full content of this document
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