During the pandemic, shoppers in many places have reached for a product, only to find an empty shelf. COVID-19, however, is only the latest among a number of factors contributing to growing supply disruptions over the past years, including climate changes, longer and more complex supply chains, and emphasis on efficiency over resiliency.
A recent study by Scott Fay, professor of marketing, and Shahryar Gheibi ’16 Ph.D., assistant professor of business analytics at Siena College and graduate of the Whitman School, looks through a marketing lens at the topic, which has primarily been studied from an operations research angle.
“We wanted to understand how retailers can best prepare for supply disruptions to maintain profits and satisfy their customers,” Fay says.
The researchers argue that retailers can address and mitigate the negative impacts of potential supply disruptions proactively, and they analyze how product mix—offering different options within a product category—impacts the optimal approach.
Fay and Gheibi suggest that, typically, the best way for retailers to deal with an unreliable supplier is to diversify their product assortment by procuring more total inventory and shifting orders toward a more reliable supplier. As an alternative, over-ordering and discarding excess products if the unreliable supplier comes through can be suitable for inexpensive products.
The authors call an intriguing third potential strategy “entrenchment,” suitable for higher-priced products that are similar to each other. A retailer would order fewer units from reliable suppliers to avoid overstock and keep prices high for products from both unreliable and reliable suppliers.
Exploring how supply disruptions affect a retailer’s optimal pricing strategy, Fay and Gheibi also suggest that under certain circumstances retailers should lower the price of their in-stock substitute product when one supplier fails to deliver its product.
Consumers, for their part, may benefit from supply disruptions, even if they cannot purchase their preferred product, since larger inventory orders can lead retailers to reduce the price for at least some of their products. Stores may also gain advantages from using less reliable suppliers, because low prices paired with uncertainty can induce customers to visit the store more often for a “treasure hunt.”
“Some supply disruptions are inevitable, even though many retailers try to reduce uncertainty, for example by only utilizing highly reliable suppliers,” Fay says. “Thus, it is imperative that retailers learn to survive and thrive in such an uncertain environment. We were surprised to find strategies that could not only mitigate lost profit from supply disruptions, but it could also lead to more satisfied customers.”
Gheibi, S. and Fay, S.,“The Impact of Supply Disruption Risk on a Retailer’s Pricing and Procurement Strategies in the Presence of a Substitute Product.” Journal of Retailing Volume 97, issue 3, 359-376, Sept. 2021.