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An Empirical Examination of the Decision to Invest in Fulfillment Capabilities: A Study of Internet Retailers

Listed author(s):
  • Taylor Randall

    ()

    (David Eccles School of Business, University of Utah, Salt Lake City, Utah 84112)

  • Serguei Netessine

    ()

    (The Wharton School, University of Pennsylvania, 3730 Walnut Street, Philadelphia, Pennsylvania 19104)

  • Nils Rudi

    ()

    (INSEAD, Boulevard de Constance, 77305 Fontainebleau Cedex, France)

Registered author(s):

    Internet technology has allowed for a higher degree of decoupling between the information-intensive sales process and the physical process of inventory management than its brick-and-mortar counterpart. As a result, some Internet retailers choose to outsource inventory and back-end operations to focus on the sales/marketing aspects of e-commerce. Nonetheless, many retailers keep fulfillment capabilities in-house. In this paper, we identify and empirically test factors that persuade firms to integrate inventory and fulfillment capabilities with virtual storefronts. Based on the extant literature and previous research in e-commerce, we formulate nine theoretical predictions. We then use data from a sample of over 50 public Internet retailers to test whether empirical data are consistent with these hypotheses. Finally, given the strategic importance and financial magnitude of the inventory investment decision, we analyze the effect of this decision on the economic success of Internet retailers during the period of study. We find that there are many circumstances in which it is prudent to own fulfillment capabilities and inventory. Empirical data are consistent with hypotheses that this tendency is higher for older firms selling small, high-margin products, offering lower levels of product variety, and facing lower demand uncertainty. We also discover that firms making inventory ownership decisions that are consistent with an empirical benchmark derived from environmental and strategic factors are less likely to go bankrupt than those making inconsistent inventory choices.

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    File URL: http://dx.doi.org/10.1287/mnsc.1050.0493
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    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 52 (2006)
    Issue (Month): 4 (April)
    Pages: 567-580

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    Handle: RePEc:inm:ormnsc:v:52:y:2006:i:4:p:567-580
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    1. Mossman, Charles E, et al, 1998. "An Empirical Comparison of Bankruptcy Models," The Financial Review, Eastern Finance Association, vol. 33(2), pages 35-53, May.
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    9. Barry L. Bayus & William P. Putsis, Jr., 1999. "Product Proliferation: An Empirical Analysis of Product Line Determinants and Market Outcomes," Marketing Science, INFORMS, vol. 18(2), pages 137-153.
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    13. Milgrom, Paul & Roberts, John, 1990. "The Economics of Modern Manufacturing: Technology, Strategy, and Organization," American Economic Review, American Economic Association, vol. 80(3), pages 511-528, June.
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