《Inventory Service-Level Agreements as Coordination Mechanisms The Effect of Review Periods》.pdfVIP

MANUFACTURING SERVICE informs OPERATIONS MANAGEMENT ® Vol. 10, No. 4, Fall 2008, pp. 609–624 doi 10.1287/msom.1070.0188 issn 1523-4614 eissn 1526-5498 08 1004 0609 © 2008 INFORMS Inventory Service-Level Agreements as Coordination Mechanisms: The Effect of Review Periods Elena Katok, Douglas Thomas, Andrew Davis Supply Chain and Information Systems Department, Smeal College of Business, Penn State University, University Park, Pennsylvania 16802 {ekatok@, dthomas@, amd361@} Asupplier stocking goods for delivery to a retailer may face a (finite-horizon) service-level agreement (SLA). In this context, the SLA is a commitment by a supplier to achieve a minimum fill rate over a specified time horizon. This kind of SLA is an important, but understudied coordination mechanism. We focus on the impact of two contract parameters: the length of the review period and the magnitude of the bonus for meeting or exceeding the service-level target. For a supplier following a base stock (order-up-to) inventory policy, increasing the bonus increases optimal supplier stocking levels, whereas lengthening the review period may increase or decrease optimal stocking levels. We investigate these mechanisms in a controlled laboratory setting and find that longer review periods are generally more effective than shorter review periods in inducing higher stocking levels. As in several earlier laboratory studies, the explan