Multiperiod Channel Coordination in Franchise Networks: The Necessity of Internal Inventory Trading and Franchiser Involvement
Author(s) Information:
Rong Li, Associate Professor of Supply Chain Management, Whitman School of Management
Liangbin Yang, Assistant Professor of Marketing, Whitman School of Management
Xiaohang Yue, Professor of Operations Management, Lubar College of Business, University of Wisconsin Milwaukee
Journal (Year):
Production and Operations Management (2023)
One sentence summarizing the essence (findings or implications) of your paper:
This article provides an internal inventory trading mechanism that can help franchise companies coordinate their network inventory sharing.
Research Questions:
What's necessary to coordinate the inventory ordering and sharing from independent franchisees in a franchise network?
What We Know:
Internal inventory trading, enabled by a disruptive IT platform and operated by a proactive franchisor, is necessary for channel coordination. Franchise companies, manufacturers with dealerships, and even companies with their own retailers face the challenge of network inventory management. How to encourage/incentivize their retailers/dealers (who have independent decision-making) to order and share the right amount of inventory is a long existing issue.
Originality/Value - Novel Findings:
We prove that internal inventory trading is necessary and characterize the coordinating trade rules. Specifically, the coordinating trade rules require the brand to (1) only profit from the royalties (not from trading), (2) set the coordinating trade prices (CTPs) to respond to the real-time channel inventory, and (3) let the buyer and the seller split shipping costs in any proportion, but not offering any subsidy.
Full Citation:
Li, R., L. Yang, X. Yue (2023), Multiperiod channel coordination in franchise networks: The necessity of internal inventory trading and franchiser involvement, published online at Production and Operations Management http://doi.org/10.1111/poms.14044
Abstract:
Facing consumers' growing demand for fast order fulfillment, it is important yet challenging for franchise companies to best incentivize frequent inventory sharing among their independent franchise retailers or dealers to achieve channel coordination. Past literature has only addressed such channel coordination for one-time inventory sharing using contractual agreements, which unfortunately do not work for frequent inventory sharing. In this study, we consider multiple inventory-sharing opportunities and propose a novel coordinating mechanism: internal inventory trading, enabled by disruptive IT platforms, such as the OneView platform's Inventory Management module (OVIM). On the OVIM, designed and operated by a brand (franchiser), every retailer (franchisee) can frequently access to all brand inventories virtually as they trade (buy or sell) inventory with one another and the brand. Using dynamic multiperiod games, we investigate how the brand should craft the trade rules and how the retailers should respond and trade periodically in equilibrium. We prove that channel coordination can be achieved in equilibrium, and the coordination requires both an internal inventory-trading platform and the brand's proactive involvement in trading as the rule and market maker. Specifically, the coordinating trade rules require the brand to (1) only profit from the royalties (not from trading), (2) set the coordinating trade prices (CTPs) to respond to the real-time channel inventory, and (3) let the buyer and the seller split shipping costs in any proportion, but not offering any subsidy. We provide a detailed characterization of the CTPs for each period, serving multiple purposes beyond simply removing double marginalization. When the channel inventory is high and imbalanced, the CTPs must include a trading reward to prevent retailers from strategically holding more or less inventory than the channel-optimal amount to “manipulate” future trade prices. The good news is that these CTPs are intuitive (constant or market-clearing) and can be automated into the trading platform ex ante. These actionable insights can guide franchise companies toward best utilizing their channel inventory and improving their profit and customer satisfaction.
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