Drivers and Implications of Direct‐Store‐Delivery in Distribution Channels

Direct‐Store‐Delivery (DSD) is an arrangement in which a retailer allows a manufacturer to execute in‐store operations such as shelf replenishments. This paper studies the economic drivers and implications of DSD for retailers and manufacturers. We consider a distribution channel where two competing manufacturers sell their products via a shelf‐space constrained retailer. The shelf space allocated to each product affects the cost associated with in‐store operations. The retailer can offer DSD to neither, one, or both manufacturers. The manufacturers respond by accepting or rejecting the retailer’s DSD offer. After the channel arrangement is determined, the manufacturers set their wholesale prices and then the retailer sets retail prices. Our results suggest that DSD is adopted when (i) the operational cost associated with shelf replenishments is convex, and (ii) competition between the manufacturers is intense enough to ensure the retailer’s willingness to offer DSD, but not so intense to deter the manufacturers from adopting DSD. Furthermore, we find that DSD increases the wholesale prices, decreases the retail prices, and increases demand for each product. The implication of this finding is that DSD can benefit not only the involved retailer and manufacturer but also the consumers.