Service failure recovery and prevention: Managing stockouts in distribution channels

Yan Dong, Kefeng Xu, Tony Haitao Cui, Yuliang Yao

Research output: Contribution to journalArticle

Abstract

In managing service failures such as stockouts, most research has emphasized preventive mechanisms, whereas stockout recovery mechanisms have been largely ignored. We propose and examine a failure-recovery mechanism (i.e., contractual stockout recovery) in the presence of demand uncertainty and compare it with failureprevention mechanisms in a dyadic distribution channel. We find that stockout recovery mechanisms can improve channel profitability under certain conditions. More importantly, we find that stockout recovery may outperform stockout prevention mechanisms such as return policy and vendor managed inventory in improving manufacturer and channel profitability. This is because stockout recovery reduces channel-wide stockout risks and allows benefits from the reduced risks to be shared between the manufacturer and the retailer, helping alleviate double marginalization. Although return policy also reduces stockout risks, it does so by increasing inventory risks in the channel without reducing channel exposure to demand uncertainty. Thus, our research suggests that stockout recovery can be an effective alternative in managing stockouts to those common methods of stockout prevention mechanisms.

Original languageEnglish (US)
Pages (from-to)689-701
Number of pages13
JournalMarketing Science
Volume34
Issue number5
DOIs
StatePublished - Sep 1 2015

Keywords

  • Distribution channel governance
  • Service failure prevention and recovery
  • Stockouts

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