Impact of supply chain power and drop-shipping on a manufacturer’s optimal distribution channel strategy

• Published in: European journal of operational research Vol. 259; no. 2; pp. 554 - 563
• Main Authors: Yu, Dennis Z., Cheong, Taesu, Sun, Daewon
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01-06-2017
• Subjects: Competition; Drop-shipping; Power structure; Pricing; Supply chain; Supply chain; Competition; Drop-shipping; Power structure; Pricing
• ISSN: 0377-2217; 1872-6860
• DOI: 10.1016/j.ejor.2016.11.025

•We study a manufacturer’s optimal distribution channel strategy.•The manufacturer uses both online and traditional retail channels.•Either drop-shipping or batch ordering can be online channel’s order fulfillment policy.•An online channel with drop-shipping may not be preferred as a dominant retail channel.•Online channel’s market share plays a crucial role in the selection of drop-shipping.
With the expansion of the Internet and the proliferation of e-businesses, many manufacturers have chosen to distribute products through online retail channels in addition to brick-and-mortar retail channels. In this paper, we consider a dual-channel supply chain in which a manufacturer considers selling a product through a conventional retail channel and an online channel. Considering two common procurement and order fulfillment policies for online retailers (etailers), conventional batch ordering and drop-shipping, we investigate the impact of supply chain power structure in terms of market power and retail channel dominance on a manufacturer’s optimal distribution channel strategy. We analyze and compare the two procurement models with respect to the etailer’s order fulfillment policies. We find that a manufacturer never prefers a drop-shipping etailer as the first mover in a sequential pricing game with a batch ordering traditional retailer. The manufacturer prefers to award the power of retail channel dominance to a batch ordering retailer with relatively high market power even if the etailer also follows a batch ordering policy. Drop-shipping benefits both the manufacturer and the etailer when the etailer has relatively low market power.