The impact of scan-based trading contracts on suppliers and retailers

Purpose Many suppliers under traditional vendor-managed inventory (VMI) contracts are switching to scan-based trading (SBT), a hybrid model that combines VMI with consignment, by agreeing to retain ownership of their products stocked at retail stores until they are sold to consumers. This deferral of change in inventory ownership reduces the retailers’ upfront investment in inventory and shifts the risks of excess inventory and shrinkage to suppliers. In this paper, we aim to find rationale behind suppliers’ willingness to adopt SBT contracts despite these risks. Design/methodology/approach A set of stylized game theoretic models involving a retailer and a supplier of a product with limited shelf life is developed to compare VMI and SBT analytically and numerically. Findings Under deterministic demand, SBT contracts not only shift the cost of retail inventory shrinkage to suppliers but also exacerbate the level of retail shrinkage by weakening the retailers’ incentives to manage inventory. However, when demand is stochastic, we find that suppliers may benefit from SBT contracts due to access to timely and granular sales data that enhance their demand forecasting capabilities, thereby potentially offsetting the increased inventory risk they assume. Practical implications These results provide rational explanations for suppliers’ decisions to switch from VMI to SBT contracts. Originality/value Previous research has not fully explained why suppliers switch from VMI to SBT contracts. We develop a game-theoretic comparison of SBT and VMI contracts with endogenous wholesale pricing and effort-dependent shrinkage to identify when SBT benefits can outweigh costs for suppliers.