Demand Pooling in Omnichannel Operations

Abstract

Both traditional retailers and e-tailers have been implementing omnichannel strategies such as buy-online pickup-at-store (BOPS). We build a stylized model to investigate the impact of the BOPS initiative on store operations from an inventory perspective. We consider two segments of customers, namely, store-only customers who only make a purchase offline, and omni-customers who strategically choose between offline and online channels. We show that BOPS may either benefit or hurt the retailer depending on two fundamental system primitives, the store visiting cost and the online waiting cost. If the online waiting cost is relatively low and the store visiting cost is even lower, BOPS can induce omni-customers to migrate from online buying to BOPS, leading to {\it demand pooling} at the bricks and mortar store. Such demand pooling provides two benefits for the retailer: it reduces the overstocking cost, and after inventory re-optimization, it results in a higher fill rate at the B\&M store, which benefits existing customers and potentially attracts more customers to the store. In contrast, if both the store visiting cost and the online waiting cost are relatively high, with the latter even higher, introducing BOPS can result in \emph{demand depooling} due to the migration of the omni-customers from offline purchasing to BOPS. This leads to a lower fill rate after inventory re-optimization, likely due to a lower profit margin under BOPS, which turns away store-only customers and hurts the retailer.

Keywords: omnichannel, retailing, channel management, inventory management