Analysis of the Optimal Threshold Policy of the E-Tailer with Mixture Strategy in E-Fulfillment

Analysis of the Optimal Threshold Policy of the E-Tailer with Mixture Strategy in E-Fulfillment

Yuepeng Cheng (College of Management and Economics, Tianjin University, Tianjin, China & College of Computer and Remote Sensing Information Technology, North China Institute of Aerospace Engineering, Langfang, China), Bo Li (College of Management and Economics, Tianjin University, Tianjin, China) and Zhenhong Li (College of Management and Economics, Tianjin University, Tianjin, China)
DOI: 10.4018/IJISSCM.2016040102
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Abstract

This study considers a supply chain consisting of a supplier and an e-tailer on the internet. The e-tailer replenishes products from the supplier for private inventory and sends drop shipping requests to him for delivering orders to customers when private inventory is insufficient or stock out, whereas the supplier provides drop shipping service with a limited ability for the e-tailer. This paper proposes an algorithm to simulate the scheduling sequences of the e-tailer with the optimal threshold policy and mixture strategy in every scheduling unit and obtains the optimal threshold of private inventory for the e-tailer to achieve average profit maximization. The impacts of mixture of demand and lead time uncertainty are examined. The influence of high priority demand variability on the optimal threshold policy in two complex scenarios are also considered in this study. These results have an important guiding significance for the e-tailer who adopts the mixture strategy in e-fulfillment under complex operating environments.
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1. Introduction

With the rapid development of e-commerce in China, more and more people begin to surf the shopping websites and buy goods on the internet, the trading volume was more than $1 trillion in 2013 according to China’s E-commerce Report (2013), so more e-tailers try their best to service customers. On the other hand, more and more customers are reluctant to wait a few days or longer to complete their orders, thus requiring rapid processing and timely servicing. Customers just click the mouse to place an order and wait for the arrival of the goods. But how can these goods get to the customers? The answer is logistics. The process of delivering goods from e-tailers to customers on the Internet (or e-fulfillment) is not only the most critical operation in e-commerce (Koster, 2002; Lummus & Vokurka, 2002), but also the weakest link in the supply chain. E-fulfillment has being an important factor for customers to buy goods from the e-tailers. Weakness in e-fulfillment has adverse effects on the e-tailers. For example, Value American lost many customers because of failures in the e-fulfillment (Netessine, Randall, & Rudi, 2002). The e-tailers strive to determine and design mixture strategy to fulfill customer demand, and drop shipping has been adopted as an e-fulfillment option besides private inventory (Xiao, Chen, & Chen, 2009).

According to a survey by E-retailing World (2000), 56% of the suppliers are willing to accept e-tailers’ drop shipping request, 30.6% of the e-tailers use drop shipping as a major e-fulfillment approach, and 44.5% of the e-tailers rely on drop shipping as an alternative e-fulfillment option. The whole operation process of drop shipping is based on the agreement between the e-tailer and the supplier. The e-tailer receives the customer demand first, and then sends a drop shipping request to the supplier. The supplier distributes goods to the final customers directly, but these customers know little about the supplier. The e-tailer is only responsible for obtaining orders from customers, whereas the supplier is simply in charge of delivering goods to customers. Goods are stored in the supplier’s inventory system, and the supplier distributes products to customers with the e-tailer’s trademark and price (Fleischmann, Agatz, & Nunen, 2008; Scheel, 1990).

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