ON INVENTORY STRATEGIES OF ONLINE RETAILERS

1.Introduction This research focuses on online retailers(etailers,hereafter)who engage in the sale of physical goods.In general,the order fulfillment process of such an etailer can be depicted by Figure1.As presented in Figure1,a customer will place an order at the etailer’s website.Upon receipt of each order,the etailer will confirm whether or not stock is available to fulfill the order.Assuming that inventory is indeed available,the order will be packaged,after which it will be delivered …

On inventory strategies of online retailers

This study focuses on inventory strategies of Internet retailers (etailers). The etailer faces options of holding her own inventory or outsourcing through the third party(ies). We assess etailer inventory strategies through mathematical modeling and numerical experiments. When ordering and holding her own stock, the etailer has full control of the order fulfillment process but bears the inventory-related risk. When outsourcing stock, etailer’s orders may not get an equal priority as for those of the third party’s own. Built upon simple operations research models, the numerical experiments suggest that the etailer is better off relying on others to fulfill orders if her demand (profit margin) is low, but should revert to the strategy of maintaining her own inventory if her sales volume (profit margin) is relatively high. Other factors are also investigated. These findings seem to confirm what are being practiced in the industry. The first author’s research is partially supported by RGC/CUHK Grant No. 2050289, and that of the second author by R-314-000-025-112 and R-314-000-002-112 from the National University of Singapore. Frank Y. Chen is an Associated Professor in the Department of System Engineering and Engineering Management, the Chinese University of Hong Kong. After receiving his BE in Mechanical Engineering from Qinghua (Tsinghua) University (1983), he joined the Department of Economics and Management at Qinghua. He also spent about a year in China Construction Bank during 1984–85. He obtained his Master degree in Economics from the University of Waterloo (1991) and his PhD in Operations Management from University of Toronto (1996). Before joining the Chinese University of Hong Kong in 2001, he taught in the Faculty of Business Administration, National University of Singapore. Currently, Dr. Chen teaches Logistics and Supply Chain Management, his research program is focused in the area of stochastic modeling in supply chain management, operations management and eBusiness. He is also interested in the applications of inventory models with risk hedging, and revenue management with real options. Dr. Chen is a member of IEEE. Sin Hoon Hum is an Associate Professor in the NUS Business School, National University of Singapore. He obtained his Bachelor Degree in Commerce and Engineering from University of Newcastle in 1979 and 1980, respectively, after which he worked for the Ministry of Defense for two years and then took a senior tutor position in National University of Singapore until 1984. Dr. Hum got his PhD from University of California in 1988, and returned to NUS as a lecturer. He served as a Vice Dean, the Department Chair of Decision Science during 1996–1999, and became the Dean of the Faculty of Business Administration from 1999–2000. His current research interests include JIT Schedules, Lotsizing Models, Supply Chain Models, and Time-based modeling. Dr. Hum has extensive consulting experiences, and organizations that he consulted include Amari Group (Thailand), Apple Computer, Port of Singapore Authority, Singapore International Airline, Sun International (Mauritius), and UPS Logistics. Cheryl H. Sim is currently with the National Library Board of Singapore. After graduating from National University of Singapore with a Bachelor Degree in Commerce, she studied the Master of Philosophy in Management in the same school from 1998–2000. This paper grew from her master thesis.