Market expansion through online-buying to store-pickup (O2S): Implications for end-to-end supply chain strategy

Abstract

A growing body of literature examines the demand effects of the increasingly popular retailing strategies of integrating digital sales channels with brick-and-mortar stores, allowing customers to buy goods online for store pick-up. Implications of such initiatives have been explored for retailing but often ignored for the associated (upstream) sourcing strategy, which affects a critical success factor: product availability. To capture the full implications of online-to-store (O2S) initiatives, we present an analytical model of the end-to-end supply chain of a brick-and-mortar retailer expanding its market via O2S. We derive equilibrium product availability involving sourcing strategy and consumer choice in pre-and post-O2S cases to provide four insights into the interdependence of O2S and sourcing strategies. First, market expansion via O2S is moderated by the retailer's sourcing strategy and is achievable with only a subset of suppliers under certain conditions. Second, O2S introduction can render an existing supplier economically infeasible. This impact is exacerbated when the cost of processing goods returned by the retailer's O2S customers is high. Third, a market-expanding O2S strategy is profitable only in limited circumstances and can lower the retailer's profit even if the probability of product returns is small and returns processing is costless. Fourth, in some cases, it is beneficial for the retailer to change its supplier (e.g., from cost-efficient to demand-responsive) after introducing O2S. These results highlight the need to jointly plan the retail and sourcing strategies in a multi-channel environment to optimize the end-to-end supply chain.