On inventory strategies of online retailers

Abstract

This study focuses on inventory strategies of Internet retailers (etailers). The etailer faces options of holding her own inventory or outsourcing through the third party(ies). We assess etailer inventory strategies through mathematical modeling and numerical experiments. When ordering and holding her own stock, the etailer has full control of the order fulfillment process but bears the inventory-related risk. When outsourcing stock, etailer’s orders may not get an equal priority as for those of the third party’s own. Built upon simple operations research models, the numerical experiments suggest that the etailer is better off relying on others to fulfill orders if her demand (profit margin) is low, but should revert to the strategy of maintaining her own inventory if her sales volume (profit margin) is relatively high. Other factors are also investigated. These findings seem to confirm what are being practiced in the industry.

Keywords

Electronic commerce / e-retailer / fulfillment / inventory

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