Mitigating Spillover in Online Retailing via Replenishment

44 Pages Posted: 26 Mar 2015 Last revised: 20 Jan 2017

See all articles by Jason Acimovic

Jason Acimovic

Penn State University, Smeal College of Business

Stephen C. Graves

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: December 5, 2016

Abstract

Online purchases constitute about one tenth of US retail sales. The supply chains that support online retailing are fundamentally different from those that support traditional brick-and-mortar stores. Traditional solutions are not always appropriate to solve online retailing’s operations problems; thus, there is an opportunity to understand and improve these novel supply chains. One key characteristic of the inventory systems for online retailing is demand spillover, whereby a stockout at a fulfillment center (FC) results in demand spilling over to another FC. For this context we examine how to allocate inventory to the FCs under a periodic-review joint-replenishment policy, with an objective to minimize outbound shipping costs for a fixed amount of inventory. We first show how traditional decentralized allocation policies may perform suboptimally and induce dynamics (whiplash) that result in costly spillover. We find that this phenomenon increases with the prevalence of local stockouts and with the level of inventory imbalance. We then describe why inventory imbalance occurs in online retailing due to operational realities and provide evidence based on real data. Finally, we propose a heuristic to allocate inventory accounting for possible spillover during the lead time. We test the heuristic by a simulation and show that it performs better than the status quo policy, is robust to operational realities, and captures over 90% of the possible improvement as compared to a pseudo-optimal policy.

Keywords: Online retailing, inventory replenishment, centralized inventory control

Suggested Citation

Acimovic, Jason and Graves, Stephen C., Mitigating Spillover in Online Retailing via Replenishment (December 5, 2016). Available at SSRN: https://ssrn.com/abstract=2459097 or http://dx.doi.org/10.2139/ssrn.2459097

Jason Acimovic (Contact Author)

Penn State University, Smeal College of Business ( email )

University Park
State College, PA 16802
United States

Stephen C. Graves

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E62-579
77 Massachusetts Avenue
Cambridge, MA MA 02139
United States
617-253-6602 (Phone)
617-253-1462 (Fax)

HOME PAGE: http://web.mit.edu/sgraves/www/

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