Managing supply chain backorders under vendor managed inventory: An incentive approach and empirical analysis

This paper shows how a manufacturer may use an incentive contract with a distributor under a VMI arrangement to gain market share. The manufacturer promises a distributor lower inventory levels in exchange for efforts by the distributor to convert potential lost sales due to stockouts to backorders. Data gathered from a third party provider of information services are then used to illustrate that this incentive arrangement may, at least implicitly, be employed in industry. Our data estimations show that when a manufacturer and distributor are operating under a VMI arrangement, lower inventory at the distributor is associated with a higher conversion rate of lost sales stockouts to backorders.