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Strategic Inventories in Competitive Supply Chains Under Bargaining

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Strategic inventory refers to the inventory held by firms purely out of strategic considerations other than operational reasons. Qinshen Tang discusses the roles of strategic inventory in a system with two parallel supply chains under both full bargaining and partial bargaining, which differ in whether inventory is included in the bargaining terms.

Image courtesy of interviewee. January 16, 2024

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This video video discusses the reasons firms hold inventory and introduces the concept of strategic inventory, which goes beyond traditional justifications like cycle, pipeline, speculative, and safety inventory. It illustrates this with an example from a steel manufacturer in Spain that holds scrap metal inventory not just for operational needs but to negotiate better prices.

This video video emphasizes that strategic inventory is used to enhance negotiation power against suppliers, impacting market dynamics. It contrasts scenarios of bilateral monopoly and competitive supply chains, concluding that strategic inventory can serve unique roles, such as signaling and influencing collusion among retailers to avoid detrimental competition.

Key findings include:
1. **Strategic Inventory's Role**: It can deviate from traditional uses; in competitive settings, it might signal to competitors to avoid excessive quantity competition.
2. **Bargaining Context**: While the conventional view links strategic inventory to negotiating power, the dynamics may change significantly when considering chain-to-chain competition.
3. **Implications for Retailers**: Retailers may benefit from including inventory decisions in negotiations, as it does not always favor them to relinquish decision-making power.

Overall, the text stresses the nuanced and context-dependent nature of inventory strategies within different supply chain frameworks and highlights the complexity of inventory roles in negotiations.

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X-TIMESTAMP-MAP:LOCAL=00:00:00.000,MPEGTS=900000

00:00.105 --> 00:01.315
Well, there are many reasons

00:01.545 --> 00:03.475
that firms actually will hold inventory.

00:03.975 --> 00:07.035
For example, cycle inventory for Economi mix of scale

00:07.795 --> 00:09.955
pipeline inventory to account for lead time

00:10.415 --> 00:13.755
and speculative inventory to mitigate price fluctuations

00:14.415 --> 00:16.875
and safety inventory to deal with the uncertainty

00:16.875 --> 00:18.675
of demand and supply.

00:19.535 --> 00:22.355
But if we eliminate all these classical reasons

00:22.535 --> 00:26.035
for holding inventory, should a form still hold inventory?

00:27.225 --> 00:28.805
And the answer is yes.

00:29.785 --> 00:34.445
For instance, the steel manufacturer salsa located in Spain,

00:35.005 --> 00:38.845
procures scrap metal ranging from this local scrap do list

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to larger euro scrap merchants.

00:42.105 --> 00:45.365
The manufacturer X does not need to carry a high level

00:45.425 --> 00:47.365
of raw materials at any time

00:47.835 --> 00:50.725
because the supply is sufficiently diversified.

00:51.515 --> 00:56.125
However, the company still stock large pools of scrap metal

00:56.875 --> 01:00.205
outside this factory, leveraging this inventory

01:00.665 --> 01:04.205
to negotiate better prices for purchasing the raw materials.

01:05.665 --> 01:08.365
So as you can see here, this practice

01:08.365 --> 01:12.405
of manipulating inventory levels for strategic gain, such

01:12.405 --> 01:14.165
as influencing the surprise prices

01:14.865 --> 01:19.165
or market dynamics, is a sophisticated approach

01:19.515 --> 01:22.605
that goes beyond this traditional inventory management.

01:23.665 --> 01:28.285
So we refer to the inventory held by firms purely out

01:28.285 --> 01:31.525
of strategic considerations other than those just mentioned

01:31.525 --> 01:35.165
operational reasons, as does strategic inventory.

01:36.335 --> 01:39.635
And a common S consideration is, for example,

01:40.445 --> 01:44.675
using the inventory to increase the negotiation power so as

01:44.675 --> 01:45.995
to lower the wholesale price

01:46.375 --> 01:48.955
of products purchase from agen suppliers.

01:50.565 --> 01:54.165
Actually, scholars have observed strategy inventory across

01:54.165 --> 01:58.725
various contexts such as consumer rebates, multi-channel

01:59.275 --> 02:00.845
copycatting, and et cetera.

02:01.345 --> 02:04.845
But all in a setting of one supply chain consisting

02:04.845 --> 02:07.005
of a supplier and a retailer,

02:07.635 --> 02:10.685
they will play the stackable game with the supplier

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as the leader and retailer as the follower.

02:15.235 --> 02:19.205
However, in practice, as you can see, that existing chain

02:19.205 --> 02:21.765
to chain competition informs usually

02:22.285 --> 02:25.085
bugging over counter turns instead

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of sequentially making decisions in a stagger

02:27.875 --> 02:29.125
game framework.

02:30.185 --> 02:34.405
And moreover, the role of strategic inventory that is

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to enhance the retailer's power actually appeals

02:38.525 --> 02:40.925
to us primarily due to the resemblance

02:41.345 --> 02:44.365
of this strategic role to a bargaining framework.

02:45.575 --> 02:48.835
Yet the bargaining framework provides a form of cooperation

02:49.305 --> 02:51.635
between the supplier and the retailer.

02:53.075 --> 02:57.135
So given the resemblance, it is unclear whether the role

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of strategic inventory

02:58.995 --> 03:01.365
Will compliment or be dominated

03:01.625 --> 03:02.765
by the bargaining framework.

03:04.265 --> 03:07.645
So in our study, we delve into the dynamics

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of two parallel supply chains, each comprising one supplier

03:12.225 --> 03:16.565
and a retailer operating over two period horizon.

03:17.505 --> 03:19.485
So we assume that the supplier

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and the retailer in the supply chain

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actually they will bargain over the trading terms.

03:25.025 --> 03:26.965
So we want to answer questions like

03:27.665 --> 03:29.925
on the bargaining framework, whether

03:30.225 --> 03:33.405
and how much inventory would the retailers hope

03:34.425 --> 03:38.925
that's the inventory play the same role in a competition

03:39.385 --> 03:41.005
as in a bilateral monopoly?

03:41.985 --> 03:45.285
And will it help a supply chain win the competition

03:46.265 --> 03:49.565
and thus carrying inventory improve the system

03:49.565 --> 03:50.685
performance or not?

03:51.265 --> 03:54.925
So as research acts employs a theoretical model,

03:55.805 --> 03:59.565
spending two periods involving two supply chains, each

03:59.595 --> 04:01.285
with the supplier and retailer,

04:02.385 --> 04:05.845
and to concentrate on the strategic aspects of inventory,

04:06.585 --> 04:09.925
the model simplifies certain reward factors such

04:09.925 --> 04:13.885
as production, cost, lead times, and salvage value.

04:14.625 --> 04:18.125
So actually this approach allows for a focused exploration

04:18.665 --> 04:22.045
of how bargaining over overall of prices, quantities,

04:22.545 --> 04:25.045
and inventory impacts the strategies

04:25.505 --> 04:28.245
and profitability of competing supply chains.

04:28.945 --> 04:30.445
So the study assumes that

04:31.105 --> 04:33.805
all the model parameters are publicly no.

04:34.745 --> 04:39.645
So additionally, the model in increases a benchmark scenario

04:40.275 --> 04:44.445
when no inventory is carried over serving as a point

04:44.465 --> 04:46.685
of comparison against the scenarios

04:46.895 --> 04:49.405
where strategy inventory is present.

04:50.145 --> 04:52.085
So we also compared results

04:52.355 --> 04:54.405
with those in a stackable gain setting.

04:55.345 --> 04:57.085
So this methodological choice

04:57.725 --> 04:59.485
actually isolates the S impacts

04:59.825 --> 05:02.885
of inventory decisions from other operational

05:03.205 --> 05:06.605
considerations, providing a cleaner understanding

05:06.785 --> 05:10.325
of the role and significance of strategy inventory

05:10.905 --> 05:12.405
in supply chain dynamics.

05:12.785 --> 05:16.685
Our studies findings are revealing a multifaceted

05:17.755 --> 05:19.655
in the scenarios of food bargaining,

05:20.145 --> 05:23.855
where audit trading terms the wholesale price audit quantity

05:24.075 --> 05:27.535
and inventory to carry are substitute bargaining.

05:28.315 --> 05:29.775
Our research observes that

05:30.435 --> 05:33.335
supply chains actually do not host strategy inventory

05:33.875 --> 05:35.735
in a bilateral monopoly setting.

05:36.575 --> 05:40.065
However, the picture changes on the chain to chain setting

05:40.755 --> 05:42.985
where strategy inventory comes into play.

05:43.725 --> 05:47.265
So as such, we can conclude that chain

05:47.265 --> 05:50.585
to chain competition leads to the strategic inventory,

05:51.165 --> 05:52.625
and that's the first results.

05:53.845 --> 05:57.765
The second is only one chain will carry inventory

05:58.505 --> 06:00.325
and the role that inventory plays

06:01.125 --> 06:03.605
deviates from traditional use of inventory

06:04.225 --> 06:06.885
to increase the retailer's negotiation power.

06:08.275 --> 06:12.215
Now it serves as a unique role as a tool for signaling

06:12.595 --> 06:14.815
and inducing collusive behavior

06:14.985 --> 06:16.535
among competing supply chains

06:16.995 --> 06:20.415
to avoid two fearers quantity competition.

06:21.635 --> 06:25.535
So the results also highlight that strategic inventory,

06:26.025 --> 06:27.815
while beneficial in some contest,

06:28.595 --> 06:31.255
can have detrimental effects on supply chain system.

06:32.895 --> 06:36.555
And in contrast on the partial bargaining scenarios,

06:37.165 --> 06:39.955
where here inventory decisions are not

06:39.955 --> 06:40.995
part of the bargaining.

06:41.655 --> 06:45.955
So inventory is held in both bilateral monopoly

06:46.455 --> 06:48.115
and horizontal competition context.

06:49.095 --> 06:51.475
So here inventory actually plays a role

06:52.055 --> 06:54.915
in enhancing the retailer's negotiation power.

06:55.735 --> 06:58.675
And this underscores the diverse strategic roles

06:59.935 --> 07:02.595
can conserve on the various bargaining frameworks.

07:03.535 --> 07:08.515
So this insights actually also emphasize the nuance on con

07:08.655 --> 07:12.555
and context dependence nature of strategic inventory.

07:13.295 --> 07:15.515
So illustrating its variety roles

07:15.975 --> 07:18.795
and impacts across different supply chain scenarios.

07:20.675 --> 07:25.075
I think that key takeaways here are first the convention

07:25.075 --> 07:28.195
wisdom about strategic inventory should be taken

07:28.625 --> 07:31.835
with caution because the traditional role

07:31.855 --> 07:34.155
of this jet inventory is

07:34.155 --> 07:36.435
to empower the retail in the supply chain.

07:36.715 --> 07:38.675
Actually is complete three now dominated

07:38.855 --> 07:40.115
by full bargaining framework,

07:40.815 --> 07:44.035
but still present if inventory is not bargained, right?

07:44.615 --> 07:45.915
So that's the faster takeaway.

07:46.495 --> 07:49.235
The second is that the inventory driven

07:49.335 --> 07:51.035
by this horizontal competition

07:51.995 --> 07:54.595
actually plays a different strategic role of signaling

07:54.975 --> 07:57.435
to the competitor to avoid an

07:57.435 --> 08:00.755
otherwise adverse quantity competition if both retailers

08:01.025 --> 08:02.435
carried high inventory.

08:03.555 --> 08:07.055
So the final is that despite the full cooperation nature

08:07.835 --> 08:09.455
of the food bargaining framework,

08:10.155 --> 08:12.895
it is not always in the retailer's interest

08:12.895 --> 08:15.535
to give up the decision power on inventory.

08:16.555 --> 08:19.335
So it would be better sometimes for the retailer

08:19.875 --> 08:22.095
to include it in the negotiation process

08:22.675 --> 08:24.215
or sometimes to give up.

00:00 - Well, there are many reasons that firms actually will hold inventory. For example, cycle inventory for Economi mix of scale pipeline inventory to account for lead time and speculative inventory to mitigate price fluctuations and safety inventory to deal with the uncertainty

00:16 - of demand and supply. But if we eliminate all these classical reasons for holding inventory, should a form still hold inventory? And the answer is yes. For instance, the steel manufacturer salsa located in Spain, procures scrap metal ranging from this local scrap do list to larger euro scrap merchants. The manufacturer X does not need to carry a high level of raw materials at any time because the supply is sufficiently diversified.

00:51 - However, the company still stock large pools of scrap metal outside this factory, leveraging this inventory to negotiate better prices for purchasing the raw materials. So as you can see here, this practice of manipulating inventory levels for strategic gain, such as influencing the surprise prices or market dynamics, is a sophisticated approach that goes beyond this traditional inventory management. So we refer to the inventory held by firms purely out of strategic considerations other than those just mentioned

01:31 - operational reasons, as does strategic inventory. And a common S consideration is, for example, using the inventory to increase the negotiation power so as to lower the wholesale price of products purchase from agen suppliers. Actually, scholars have observed strategy inventory across various contexts such as consumer rebates, multi-channel copycatting, and et cetera. But all in a setting of one supply chain consisting of a supplier and a retailer,

02:07 - they will play the stackable game with the supplier as the leader and retailer as the follower. However, in practice, as you can see, that existing chain to chain competition informs usually bugging over counter turns instead of sequentially making decisions in a stagger game framework. And moreover, the role of strategic inventory that is to enhance the retailer's power actually appeals to us primarily due to the resemblance

02:41 - of this strategic role to a bargaining framework. Yet the bargaining framework provides a form of cooperation between the supplier and the retailer. So given the resemblance, it is unclear whether the role of strategic inventory Will compliment or be dominated by the bargaining framework. So in our study, we delve into the dynamics of two parallel supply chains, each comprising one supplier and a retailer operating over two period horizon.

03:17 - So we assume that the supplier and the retailer in the supply chain actually they will bargain over the trading terms. So we want to answer questions like on the bargaining framework, whether and how much inventory would the retailers hope that's the inventory play the same role in a competition as in a bilateral monopoly? And will it help a supply chain win the competition and thus carrying inventory improve the system

03:49 - performance or not? So as research acts employs a theoretical model, spending two periods involving two supply chains, each with the supplier and retailer, and to concentrate on the strategic aspects of inventory, the model simplifies certain reward factors such as production, cost, lead times, and salvage value. So actually this approach allows for a focused exploration of how bargaining over overall of prices, quantities, and inventory impacts the strategies

04:25 - and profitability of competing supply chains. So the study assumes that all the model parameters are publicly no. So additionally, the model in increases a benchmark scenario when no inventory is carried over serving as a point of comparison against the scenarios where strategy inventory is present. So we also compared results with those in a stackable gain setting. So this methodological choice

04:57 - actually isolates the S impacts of inventory decisions from other operational considerations, providing a cleaner understanding of the role and significance of strategy inventory in supply chain dynamics. Our studies findings are revealing a multifaceted in the scenarios of food bargaining, where audit trading terms the wholesale price audit quantity and inventory to carry are substitute bargaining. Our research observes that

05:30 - supply chains actually do not host strategy inventory in a bilateral monopoly setting. However, the picture changes on the chain to chain setting where strategy inventory comes into play. So as such, we can conclude that chain to chain competition leads to the strategic inventory, and that's the first results. The second is only one chain will carry inventory and the role that inventory plays deviates from traditional use of inventory

06:04 - to increase the retailer's negotiation power. Now it serves as a unique role as a tool for signaling and inducing collusive behavior among competing supply chains to avoid two fearers quantity competition. So the results also highlight that strategic inventory, while beneficial in some contest, can have detrimental effects on supply chain system. And in contrast on the partial bargaining scenarios, where here inventory decisions are not

06:39 - part of the bargaining. So inventory is held in both bilateral monopoly and horizontal competition context. So here inventory actually plays a role in enhancing the retailer's negotiation power. And this underscores the diverse strategic roles can conserve on the various bargaining frameworks. So this insights actually also emphasize the nuance on con and context dependence nature of strategic inventory. So illustrating its variety roles

07:15 - and impacts across different supply chain scenarios. I think that key takeaways here are first the convention wisdom about strategic inventory should be taken with caution because the traditional role of this jet inventory is to empower the retail in the supply chain. Actually is complete three now dominated by full bargaining framework, but still present if inventory is not bargained, right? So that's the faster takeaway.

07:46 - The second is that the inventory driven by this horizontal competition actually plays a different strategic role of signaling to the competitor to avoid an otherwise adverse quantity competition if both retailers carried high inventory. So the final is that despite the full cooperation nature of the food bargaining framework, it is not always in the retailer's interest to give up the decision power on inventory.

08:16 - So it would be better sometimes for the retailer to include it in the negotiation process or sometimes to give up.

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