Relaxing channel separation: Integrating a virtual store into the supply chain via transshipments

Abstract

Many established companies have started to use virtual stores as a direct distribution channel in addition to their existing indirect retail channels. These companies must now decide on how to integrate these channels. The alternatives are to operate dedicated distribution channels for the virtual store and the retail stores or to tightly integrate the virtual store into the existing distribution channels. In such an integrated supply chain, retail stores would continue to serve all in-store customers, but excess stock at retail stores could be used to fill some online orders. We analyze this problem from a supply chain perspective by developing and solving mathematical models for both dedicated and integrated supply chains. We characterize the optimal inventory policy and quantify the expected cost savings that can be achieved by using an integrated supply chain over a dedicated supply chain. We show that the cost savings can be significant and that both retailers and customers benefit from an integrated supply chain. We also analyze how the optimal solutions depend on the characteristics of the supply chain and identify conditions under which it would be optimal to operate the virtual store without dedicating any inventory to the virtual store. Throughout the paper, we illustrate our analytical results with numerical examples.

Acknowledgement

The authors thank Professors W. H. Hausman and H. L. Lee, Stanford University, for several suggestions that improved this paper as well as J. P. Bowman, Hewlett-Packard Company, for his support in conducting correlation analyses. The authors would also like to thank the anonymous referees for their constructive and detailed feedback.