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

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  • Yu, Dennis Z.
  • Cheong, Taesu
  • Sun, Daewon

Abstract

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.

Suggested Citation

  • Yu, Dennis Z. & Cheong, Taesu & Sun, Daewon, 2017. "Impact of supply chain power and drop-shipping on a manufacturer’s optimal distribution channel strategy," European Journal of Operational Research, Elsevier, vol. 259(2), pages 554-563.
    • Handle: RePEc:eee:ejores:v:259:y:2017:i:2:p:554-563
    DOI: 10.1016/j.ejor.2016.11.025
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    References listed on IDEAS

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