What's Necessary to Coordinate the Inventory Ordering and Sharing from Independent Franchisees in a Franchise Network?

As consumers increasingly demand fast order fulfillment, franchise companies are faced with the challenge of how best to manage their network’s frequently changing inventory to prevent local shortages, delays and waste of unsold goods.

“With the increasing availability of information technology and fast shipping, more companies are thinking about how to better utilize the inventory that already exists within the system,” says Rong Li, associate professor of supply chain management.

With colleagues Liangbin Yang, assistant professor of marketing, and Xiaohang Yue, professor of operations management at the University of Wisconsin Milwaukee, she tackled this issue in an article recently published in Production and Operations Management.

While past research studied channel coordination for one-time inventory sharing with individual contracts, this framework does not work for the more complex problem of sharing goods across a network of stores and multiple periods of time.

The researchers created a model of a brand and two franchisees in two versions: either the brand decided in each period how to produce and distribute or redistribute channel inventory (centralized), or the brand adopted the disruptive OneView platform’s Inventory Management module (OVIM) and set the trade rules—including trade prices, a fixed royalty, and who pays for shipping (decentralized). In each period, if the independent retailers accepted the rules, the model ran games to see whether and how retailers would trade with one another and the brand.

The results supported the researchers’ proposal to use OVIM as a novel coordinating mechanism. A franchiser can employ it to operate an internal market, where franchisees can see the available inventory in real time and trade with each other frequently.

According to the model, trading needs to be governed by specific rules to run optimally. First, franchisers should only profit from royalties that retailers pay for the privilege of using the brand name, not from additional margins on trading goods. Second, the franchiser needs to act as a market maker and set internal market prices proactively, responding in real time to balance out inventory, bids and asks. Third, shipping costs can be split by the buyer and seller in any proportion but should not be subsidized, as this could lead to overtrading.

“As a franchiser, you can maximize the system with these strategies,” Li says. “You can make everybody happy.”

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.