Stockout Recovery under Consignment: The Role of Inventory Ownership in Supply Chains

Kefeng Xu, Rui Yin, Yan Dong

Research output: Contribution to journalArticlepeer-review

9 Scopus citations


We examine how a supply chain firm may implement an incentive contract under inventory consignment to recover stockouts and to retain customers. Inventory consignment allows an upstream firm (e.g., a manufacturer) to own and control inventory at a downstream firm (e.g., a retailer), representing a structural change in supply chain governance. Motivated by cases in pet toy and electronics component industries, we formulate principal-agent models based on the newsvendor framework to capture the strategic interactions in a supply chain. We find that consignment can be effective in reducing stockouts because the ownership and control of the product by the manufacturer allows better prevention of stockouts, which complements stockout recovery and leads to fewer stockouts. However, the lower level of stockout under consignment does not necessarily translate into profitability-when the manufacturer is highly opportunistic, that is, readily exploring outside opportunities for its product, consignment may lead to lower profitability for both the manufacturer and the supply chain. On the other hand, consignment will improve profitability for the manufacturer and the supply chain, if both the manufacturer opportunism and the retailer opportunism are moderate.

Original languageEnglish (US)
Pages (from-to)94-124
Number of pages31
JournalDecision Sciences
Issue number1
StatePublished - Feb 1 2016


  • Backorders
  • Business-to-Business Marketing
  • Channel Governance
  • Consignment Inventory
  • Incentive
  • Newsvendor Model
  • Service Failure and Recovery

ASJC Scopus subject areas

  • Business, Management and Accounting(all)
  • Strategy and Management
  • Information Systems and Management
  • Management of Technology and Innovation


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