Impact of Inventory Risk on Sales Effort Provisioning : Theoretical Predictions and Empirical Evidence

In this paper, we examine the impact of inventory risk allocation on the sales effort decisions when a firm sells products directly to consumers through independent agents. Building upon a game-theoretic model of a seasonal product whose demand is uncertain, we compare the optimal sales effort, sales volume and firm profitability under a push versus pull system. Subsequently, we test the key theoretical predictions using a novel dataset to understand and validate the key drivers of the firm's and agent's decision making process. In contrast to the extant literature, we show that a push system can lead to higher firm performance when demand is driven primarily through sales effort even when it transfers significant inventory risk to the agents. This is because when the agents' sales ability is high, they are able to better manage the inventory risk imposed by a push system through their sales effort choices. We also find that the optimal sales compensation that offers agents additional incentives for meeting certain sales thresholds exhibit counter-intuitive and non-monotonic behavior. Importantly, offering incentives that are tailored to match the characteristics of push and pull systems can enable firms to both motivate effort and improve profitability. The empirical analysis, which uses multi-year cookie sales data from a large local council of the Girl Scout organization, first estimates the sales ability of girl scouts and then validates the key theoretical predictions regarding the relationship between an agent's sales ability and a firm's ordering policy requirements. We find that the push system widens the individual sales performance gap by approximately 58 boxes between two girl scouts who are separated by one standard deviation (183 boxes) of sales ability, which is a 62% increase from the pull system. The detailed individual-level data that also captures the different sales activities of individual girl scouts enables us to unravel the drivers behind our empirical findings. These findings have important implications for direct selling firms that offer unique products through non-traditional distribution channels