Moral hazard, power, and risk sharing in scan-based trading

While scan-based trading (SBT) is a growing trend in the retail industry, evidence suggests that many SBT initiatives have contributed only to the retailers’ bottom line at the suppliers’ expense. This research attempts to disclose some of the causes of SBT failure as a collaborative inventory management initiative and identify SBT’s integrative potential using both positivistic and normative research methodologies.

In the first chapter, SBT contracts are analyzed through the lens of Agency Theory. By focusing on unique inventory ownership and risks considerations resulting from retailers managing supplier-owned inventory without bearing the cost of inventory shrinkage, the effect of SBT on inventory shrinkage is examined empirically using a data set from a packaged bakery manufacturer. The results show that inventory shrinkage tends to be higher under SBT contracts compared to traditional vendor-managed inventory (VMI) contracts. The study highlights a potential loss in efficiency in food supply chains reflected in higher shrinkage under SBT contracts.

The second chapter aims to identify conditions under which SBT contracts could be mutually beneficial for retailers and suppliers. Using stylized game theoretic models involving a retailer and a supplier of a product with limited shelf life, the study finds that, while inventory shrinkage may be amplified under SBT contracts compared to VMI contracts due to the decreased retailer’s incentive to manage inventory at the store, SBT could help suppliers minimize inventory overage and underage under high demand uncertainty. The integrative potential for SBT contracts, thus, lies in the trade-off between inventory shrinkage and forecasting accuracy.

In the third paper, the role of bargaining power on the performance of SBT contracts is examined. Based on the bargaining literature, it is hypothesized that perceptions of bargaining power can be reshaped in the bargaining process through concession tactics. The results of a negotiation experiment show that, while powerful retailers do tend to have the upper hand in negotiating SBT contracts, weak suppliers could ameliorate or even overcome retailer power by offering services as a concession in a way that the product-service bundle improves the value of their offerings in the eyes of the retailers.