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A (Q,R) inventory model with a drop-shipping option for e-business

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  • Khouja, Moutaz
  • Stylianou, Antonis C.

Abstract

Drop shipping is used by online as well as traditional retailers as an order fulfillment strategy. A retailer simply forwards customers' orders to the manufacturer or a distributor who fills the orders directly to the customers and is paid a predetermined price by the retailer. For the retailer, advantages of drop shipping include lower holding, handling, and shortage costs. Disadvantages include increased per-unit cost, fragmented order delivery when a single customer order involves products from different manufacturers, longer delivery times, and increased order processing cost. In this paper, we develop two (Q,R) inventory models that allow a retailer to use the drop-shipping option in case of a shortage during lead-time. In the first model, the units short are backordered whereas in the second model sales are lost. We provide closed-form results for exponential and uniform demand distributions. We perform numerical sensitivity analysis and illustrate the results with numerical examples.

Suggested Citation

  • Khouja, Moutaz & Stylianou, Antonis C., 2009. "A (Q,R) inventory model with a drop-shipping option for e-business," Omega, Elsevier, vol. 37(4), pages 896-908, August.
    • Handle: RePEc:eee:jomega:v:37:y:2009:i:4:p:896-908
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    References listed on IDEAS

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    1. Bichescu, Bogdan C. & Fry, Michael J., 2009. "A numerical analysis of supply chain performance under split decision rights," Omega, Elsevier, vol. 37(2), pages 358-379, April.
    2. Yao, Dong-Qing & Yue, Xiaohang & Mukhopadhyay, Samar K. & Wang, Ziping, 2009. "Strategic inventory deployment for retail and e-tail stores," Omega, Elsevier, vol. 37(3), pages 646-658, June.
    3. Yao, Dong-Qing & Liu, John J., 2005. "Competitive pricing of mixed retail and e-tail distribution channels," Omega, Elsevier, vol. 33(3), pages 235-247, June.
    4. Hua, Zhongsheng & Li, Sijie, 2008. "Impacts of demand uncertainty on retailer's dominance and manufacturer-retailer supply chain cooperation," Omega, Elsevier, vol. 36(5), pages 697-714, October.
    5. Ayanso, Anteneh & Diaby, Moustapha & Nair, Suresh K., 2006. "Inventory rationing via drop-shipping in Internet retailing: A sensitivity analysis," European Journal of Operational Research, Elsevier, vol. 171(1), pages 135-152, May.
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    Cited by:

    1. He, Bo & Gupta, Varun & Mirchandani, Prakash, 2021. "Online selling through O2O platform or on your own? Strategic implications for local Brick-and-Mortar stores," Omega, Elsevier, vol. 103(C).
    2. Ramzi Hammami & Erfan Asgari & Yannick Frein & Imen Nouira, 2022. "Time- and price-based product differentiation in hybrid distribution with stockout-based substitution," Post-Print hal-03696900, HAL.
    3. Yu, Dennis Z. & Cheong, Taesu & Sun, Daewon, 2017. "Impact of supply chain power and drop-shipping on a manufacturer’s optimal distribution channel strategy," European Journal of Operational Research, Elsevier, vol. 259(2), pages 554-563.
    4. Alawneh, Fawzat & Zhang, Guoqing, 2018. "Dual-channel warehouse and inventory management with stochastic demand," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 112(C), pages 84-106.
    5. Leonard Calin ABRUDAN & Mirabela Constanta MATEI & Maria Madela ABRUDAN, 2018. "Running A Business Through A Sharing Responsibilities (And Profits) Strategy," Proceedings of the INTERNATIONAL MANAGEMENT CONFERENCE, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 12(1), pages 28-38, November.
    6. Kim, Nayeon & Montreuil, Benoit & Klibi, Walid, 2022. "Inventory availability commitment under uncertainty in a dropshipping supply chain," European Journal of Operational Research, Elsevier, vol. 302(3), pages 1155-1174.
    7. Li, Guo & Zhang, Xuefeng & Liu, Mengqi, 2019. "E-tailer’s procurement strategies for drop-shipping: Simultaneous vs. sequential approach to two manufacturers," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 130(C), pages 108-127.
    8. Cobb, Barry R. & Johnson, Alan W. & Rumí, Rafael & Salmerón, Antonio, 2015. "Accurate lead time demand modeling and optimal inventory policies in continuous review systems," International Journal of Production Economics, Elsevier, vol. 163(C), pages 124-136.
    9. Changkyu Park, 2017. "A Partial Backordering Inventory Model with a Drop-Shipping Option Under Purchase Dependence," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 34(04), pages 1-20, August.
    10. Qiu, Ruozhen & Sun, Yue & Sun, Minghe, 2022. "A robust optimization approach for multi-product inventory management in a dual-channel warehouse under demand uncertainties," Omega, Elsevier, vol. 109(C).
    11. Hammami, Ramzi & Asgari, Erfan & Frein, Yannick & Nouira, Imen, 2022. "Time- and price-based product differentiation in hybrid distribution with stockout-based substitution," European Journal of Operational Research, Elsevier, vol. 300(3), pages 884-901.

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