Supply Chain Contracts and Inventory Shrinkage: An Empirical Analysis in the Grocery Retailing Industry

Contracts in grocery supply chains based on Scan-Based Trading (SBT) have recently emerged as alternatives to contracts based on Vendor-Managed Inventory (VMI) as governance mechanisms between retailers and vendors. In contrast to VMI, vendors under SBT remain the owners of inventory delivered to retailers until it is sold to consumers. While SBT contracts offer clear benefits to retailers and suppliers, they also carry unique inventory risks which result from retailers marketing and selling supplier-owned inventory without bearing all the cost of mismanagement. Further risks in both of these arrangements arise from vendors’ contracting out store deliveries to third party logistics (3PL) providers as opposed to taking on the responsibility for deliveries themselves. This paper examines the effect of SBT on inventory shrink relative to VMI using data from a supplier delivering directly to stores using a combination of 3PL and supplier employees. We find that shrink levels tend to be higher under SBT relative to VMI. We also observe that supplier decisions to contract store deliveries out to 3PL providers yield higher shrink levels under SBT and VMI contracts. Based on average inventory replenishment amounts at retail stores, SBT contracts account for 10.20% in shrink relative to VMI contracts. In addition, 3PL contracts account for 2.92% in shrink relative to the amounts observed when the vendor bears responsibility for store deliveries. Our findings highlight potential losses in efficiency in grocery supply chains reflected in higher shrink under SBT and 3PL contracts that may undercut the promised benefits from these arrangements.