Working Paper | HBS Working Paper Series | 2015

The Impact of Supplier Inventory Service Level on Retailer Demand

by Nathan Craig, Nicole DeHoratius and Ananth Raman

Abstract

To set inventory service levels, suppliers must understand how changes in inventory service level affect demand. Although researchers have studied the impact of a supplier's service level on its demand using analytical models and laboratory experiments, this relationship has not, to the best of our knowledge, been tested in the field. We study how the supplier Hugo Boss's inventory service level affects demand from its retail customers. We find increases in historical service level to be associated with statistically significant and managerially substantial increases in current retailer orders (i.e., demand, not just sales). Specifically, upon controlling for other factors that might affect retailer demand, we find a 1 percent increase in this supplier's type 1 service level measured over the prior year to be associated with a 13 percent increase in current retailer demand. Further, we find that retailers that order frequently exhibit a larger reaction to changes in service level, an outcome that is consistent with retailers learning about and responding to changes in the supplier's service level. We discuss features of a retail buyer's decision context identified through our field work that may drive the relationship. We also highlight that suppliers seeking to estimate the relationship between inventory service level and demand in practice can benefit from adopting the methodology presented herein.

Keywords: Customer Satisfaction; Forecasting and Prediction; Learning; Consumer Behavior; Service Delivery; Performance Expectations; Apparel and Accessories Industry; Service Industry;

Citation:

Craig, Nathan, Nicole DeHoratius, and Ananth Raman. "The Impact of Supplier Inventory Service Level on Retailer Demand." Working Paper. (Revised May 2015.)