The Industrial Dynamics of Order Rationing, Shortage Gaming, and Retail Promotions Demand Shock: A Discrete Event Simulation Experiment

This research investigates the impact of order rationing strategies, shortage gaming responses, and retail promotions demand shock on the long-term system performance of the inventory ordering and fulfillment process between competing retailers and a shared upstream manufacturer. The research addresses a need to understand the horizontal dynamics of competition for supply inventory among interconnected entities within business systems. It also expands understanding of the interactions between various manufacturer order rationing strategies and retailer shortage gaming responses, in the context of supply capacity constraints arising from a retail promotions demand shock. A discrete event simulation based on a US major appliance supply chain was developed. Results from the simulation experiment indicate a strong impact from order rationing strategies and shortage gaming responses on long-term outcomes such as demand variance, order fill rates, opportunity loss, and inventory carrying cost. In contrast, a single retail promotions demand shock has limited long-term impact on system performance. Overall, the findings suggest that both vertical and horizontal entities within business systems are significantly impacted by each entity’s actions within the inventory ordering and fulfillment feedback loop. Also, interactions between manufacturer order rationing strategies, retailer shortage gaming responses, and retail promotions demand shock are complex, particularly when considered over time. There are both positive and negative impacts relative to each entity within the inventory ordering and fulfillment feedback loop