Site-to-Store or Store-to-Site? Application of One-Way Transshipment in Dual-Channel Retailing

Abstract

We compare site-to-store and store-to-site strategies for dual-channel integration. The site-to-store (resp., store-to-site) strategy can ll unmet orders in the physical channel (resp., online channel) with the inventory in the online channel (resp., physical channel). With one (physical) retail store, when only one channel should have inventory, it is the channel with stochastically larger or less uncertain demand. Otherwise, with both channels carrying inventory, the optimal channel integration depends on demand uncertainty and product's contribution margin. For high-margin products, the retailer should use the leftover inventory of the low-uncertainty channel to fulfill unmet orders of the other. Furthermore, the site-to-store (resp., store-to-site) strategy becomes more attractive for high-margin (resp., low-margin) products with larger number of retail stores. Also, with many retail stores, channel integration with one-way transshipment achieves most of the risk-pooling benefits, and the additional gain from adding a new direction of transshipment is negligible. We propose a heuristic that only requires a comparison of online demand standard deviation and the sum of demand standard deviations of retail stores in identifying an effective integration strategy. Finally, we apply our results to a circular spatial model for dual-channel retailing systems and obtain insights on the impact of customer purchasing behavior on strategy selection.