Inventory allocation behavior of the distributor during demand shocks and supplier disruptions

Abstract

Inventory allocation is one of the main operations in any supply chain. Most of the time inventory allocation for the retailer is done by the manager of the distribution center. Literature reports three allocation mechanisms namely; proportional, linear, and uniform which can be used by the distributor when allocating inventory to their retailers. However, the distributor struggles to identify the best allocation mechanism when there is a mismatch between available supply and demand. We investigate the inventory allocation behavior of the distributor under three different scenarios; (i). when there are positive demand shocks, (ii) when there are supply disruptions, and (iii) when there are both scenarios. We used a computerized laboratory experiment to study the allocation behavior. We employed undergraduate students as participants in our laboratory experiment. The participants in all treatments were assumed as distributors and they were asked to allocate the inventory using any inventory allocation mechanism out of the three mechanisms. ANOVA techniques were used to analyze our data. Our results suggest, the proportional allocation mechanism as the best allocation mechanism when there are demand spikes. A liner allocation mechanism is ideal to use when there are supply disruptions. Further, when there are both demand spikes and supply disruptions, we recommend using the liner allocation mechanism.