Reinvent Retail Supply Chain: Ship‐from‐Store‐to‐Store

Abstract

Retailers such as Best Buy are reinventing their supply chains for the era of Omnichannel with new strategies like ship‐from‐store‐to‐store (SFSTS) where stores are also used as shipping points. Under the SFSTS practice, to fill the demand (offline and online) from a customer region, two or more nearby stores of the retailers’ frequently replenish from each other as well as from a distribution center (DC) to better prepare inventory before the demand arrives. We study how to best replenish the DC and multiple nearby stores under this new practice using a multi‐period inventory model with proactive transshipments. To the best of our knowledge, this study is the first to solve this model, and the characterized optimal replenishment policy is valuable especially as it differs significantly from the past relevant literature on single‐period models. In contrast, for the DC, although the procure‐up‐to policy is still optimal, the procure‐up‐to level is no longer constant but depends on all stores’ on‐hand inventory. For each store, the optimal policy no longer remains the same structure but changes with whether the DC procures inventory from the supplier. When the DC procures inventory, the stores’ optimal policy is no longer single‐threshold, but two‐threshold (order‐up‐to and ship‐down‐to); and these thresholds decrease in any other store’s on‐hand inventory. When the DC does not procure inventory, the stores ship between each other only when their inventories are imbalanced enough, and they ship until the benefit drops to just cover the shipping cost. Our results demonstrate that it is important to constantly track every store’s on‐hand inventory and it is much more complex to implement SFSTS with more nearby stores, despite the additional profit earned.