Retail promotions and information sharing in the supply chain: a controlled experiment

Abstract

Purpose Communication between supply chain partners is critical for replenishment decision making. Decision support systems still require significant human decision making with regard to replenishment when promotions are involved. The purpose of this paper is to study the impact of the sharing of information about the magnitude and timing of retail promotions on cost efficiency in the supply chain. The authors compare performance against theoretical benchmarks and draw conclusions significant to managers. Design/methodology/approach The subjects in Study 1, 30 undergraduate students at a large, US university, completed the experiment in a single session lasting approximately 60 minutes. The experiment involved a simple, multi‐period replenishment task, played as individuals, that was somewhat like the newsvendor game. Subjects in the experiment employed in Study 2 were senior‐level members of multiple departments from a large consumer products manufacturer in the USA. Participating departments included sales, operations, and supply chain. Self‐reported questionnaires revealed that the average subject had 15 years of experience with supply chain issues and seven years of experience with replenishment. The study was conducted in a single session, lasting approximately two hours, at the corporate headquarters of the participating company. In this experiment, 76 unique subjects participated. Findings Results from the single‐echelon study reveal the cost‐reducing effect of knowing the magnitude and timing of demand generated by a promotion. However, the poor performance, compared with the theoretical benchmarks, by respondents in the multi‐echelon study, even when the lead time per node is half that of the single‐echelon case and the subjects were experienced managers, highlights the complexity of the task that results from a lack of coordination. Practical implications Billions of dollars are spent on retail promotions each year. The management of the forecasting and replenishment of inventory for such promotions is difficult to automate and requires significant human decision making. The paper explores some key issues that are important in the replenishment decision‐making scenario when a promotion is involved. Originality/value Although the most obvious managerial recommendation for reducing the coordination and planning problems associated with promotions is simply to communicate more, the authors' research also suggests it may not be enough to alter performance. The results suggest that while communication is helpful, coordination may represent a more serious challenge.

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