The Interplay of Organizational Structure and Strategic Inventory Under Supply Chain Competition

Abstract

In this study, we investigate the impact of organizational structures on supply chain participants, specifically when retailers establish strategic inventory in a competitive environment. We build a two-period supply chain model in which two retailers procure from a common supplier, compete in multiple markets, and can carry inventory from the first period to the second. We characterize the optimal strategies for firms under three scenarios, depending on whether each retailer operates under centralization or decentralization. Contrary to previous research, we find that it is not beneficial for a retailer to hold strategic inventory when the retailer is decentralized and the rival is centralized, regardless of how small the holding cost is. This result demonstrates the existence of free-riding behavior, where a decentralized retailer does not carry any inventory but benefits from the rival’s strategic inventory, provided the rival is centralized. Furthermore, centralization increases a retailer’s strategic inventory level but lowers its rival’s level, irrespective of the rival’s organizational structure. Centralization by any retailer enhances the overall strategic inventory level in the supply chain.