Coordinated Drop Shipping Commitment Contract in Dual-Distribution Channel Supply Chain

Coordinated Drop Shipping Commitment Contract in Dual-Distribution Channel Supply Chain

Jinshi Zhao (Business College, Shanghai Normal University, Shanghai, China), Yongrui Duan (College of Economics and Management, Tongji University, Shanghai, China), Shijin Wang (College of Economics and Management, Tongji University, Shanghai, China) and Jiazhen Huo (College of Economics and Management, Tongji University, Shanghai, China)
Copyright: © 2012 |Pages: 12
DOI: 10.4018/jeco.2012100102
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Abstract

It is a general trend for retailers to develop dual channel to serve different customers. Engaging in internet and drop shipping has raised serious awareness and attention in the retailing field. Retailers are competing for dominance from suppliers using terminal position in many industries like appliance and fast moving consumer goods. In this paper, the authors examine such supply chain context and propose the commitment contracts for the drop shipping supply chain. In a drop-shipping model, the retailer focuses on marketing and customer acquisition, so it has more customer demand information than the supplier. To optimize profit, the retailer usually sends over-estimated demand information to the supplier. On the contrary, the supplier has to design a contract to control such a behavior of the retailer. Their study is to optimize the profit of the supplier and the whole supply chain using the commitment contract that can coordinate the retailer and the supplier in dual-channel and drop-shipping supply chain. If the retailer’s order quantity achieves centralized level, the profit of the supply chain can be maximized.
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Introduction

Drop-shipping is a commonly adopted order fulfillment strategy for retailer’s online distribution channel or part store-based channel by which the retailer does not keep goods in stock, but transfers customer orders and shipment details to manufacturer, who then delivers the ordered goods directly to the customer. In such a supply chain, the retailer markets and sells a product at a retail price. Then, after the customer purchases the item, the retailer places an order for the product just sold with a manufacturer who charges the retailer a wholesale price and delivers the product directly to the customer. Because of the coexistence of store-based distribution network and web site distribution network, the retailer needs to prepare two kinds of inventories, its own inventory and the drop-shipping inventory. We focus on such complicated dual channel and drop shipping supply chain and consider the coordination in decentralized and centralized context.

Traditional retailers have integrated e-commerce platforms into their channel to get online consumers to buy their products. Walmart.com has become the most popular internet shopping site as Amazon.com does. Suning Appliance Co aims to boost its online sales up to 30 billion RMB (US$4.4 billion) within 2010 to 2012 and to capture up to 20% of the online electrical appliance market in China. The leading consumer products company of the world Procter & Gamble has opened an online store offering daily personal care products in 2009 on the Chinese Internet shopping website Taobao.com. Meanwhile, many pure online retailers have opened real-world stores or have collaborated with traditional retailers. Kate Morris launched online cosmetics retailer Adore Beauty in 2000 and opened a real-world store in Melbourne in 2004 in order to add credibility and trust to both customers and suppliers. Taobao, the largest online C2C and B2C retail giant in China, which covers 200 billion RMB (About 29 billion U.S. dollars) trade volume or 83% of China’s online shopping market share in 2009(ChinaBusiness, 2010), has began to develop a real-world store system named Taoyizhan in 2009. According to the research of Shop.org, an industry trade association, 78% of online shoppers also buy from physical stores, 45% of them also buy through the catalog channel, and 23% of catalog shoppers also make purchases on the company’s Web site.

In traditional retail store setting, the retailer order the products in bulk from the manufacturer, that is to say the retailer have to maintain proper storage area, hire employees to handle the stock and invest in security measures. With drop shipping, the retailer can devote more space to displays, and hire fewer employees to handle shipping, receiving, inventory and security. Meanwhile the manufacturer can use third party logistics companies to get the ordered product to customer directly, they benefit from reduced shipping costs and more sales exposure of their products. With further development of drop shipping, many traditional retailers and internet-only stores discover they can offer products without worrying about importation costs or expensive storage. Thus in the whole supply chain, there is virtually no inventory to track and multi-channel retail is available. Drop shipping is usually a viable option for the retailer with low cash flow because it is paid before it has to purchase the products. It is a practical solution that saves time and money, and decreases the stress of shipping, so it can provide numerous benefits that make building a successful business a viable option by convenience and minimizing risk.

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