Dual-channel supply chain: A strategy to maximize profit

Abstract

The rapid pace of e-commerce development has resulted in several manufacturers selling their products online to stay competitive and increase accessibility to their products. This paper investigates the effect of adopting a dual-channel (comprised of a traditional retail channel and a direct online channel) on the performance of a two-level supply chain (manufacturer-retailer). Through this strategy, the manufacturer would like to offer customized products through a direct online channel (i.e. make-to-order), in addition to offering its standard product through the traditional retail channel (i.e. make-to-stock). The objective is to maximize the total profit of the system when this strategy is adopted. A linear demand function is used for both channels in which the demand depends on the selling prices (markup margin), the quoted delivery lead-time, and product differentiation. This investigation is compared to a benchmark scenario, where the supply chain is comprised of a single-channel strategy (retail channel only) where one type of product is offered; the standard product. In both strategies, the paper analyzes the change in the profit, markup margin and the inventory decisions that result from adopting the dual-channel strategy. The findings of this paper demonstrate that adding a customized-product online channel would increase the profit of the centralized supply chain system. However, it created a conflict due to competition between the retail and online channels. A numerical example and sensitivity analysis have been used to demonstrate this effect and to draw specific managerial insights.