Sourcing Strategies for Online Retail Marketplaces

30 Pages Posted: 22 Oct 2015 Last revised: 21 Apr 2018

See all articles by Vishal Gaur

Vishal Gaur

Cornell University - Samuel Curtis Johnson Graduate School of Management

Nikolay Osadchiy

Emory University - Goizueta Business School

Sridhar Seshadri

University of Illinois at Urbana Champaign; Indian School of Business

Marti G. Subrahmanyam

New York University (NYU) - Department of Finance

Date Written: December 2017

Abstract

We study a problem of optimal sourcing for a retailer who sells a seasonal product in an online marketplace such as Amazon marketplace. The problem is characterized by uncertain demand, uncertain selling price, and low profit margins. Sourcing choices are differentiated by cost and available lead times -- delaying to a shorter lead time is more expensive, but yields more accurate information about selling price and demand. Ahead of the season, the retailer faces a continuous time decision problem about when to buy and in what quantity. We consider two sourcing strategies: an optimal pre-committed ordering time strategy and an optimal time-flexible ordering strategy. Under the latter strategy, the optimal order time follows a double threshold policy in the selling price variable: it is optimal to order if the price is within a certain band, and wait otherwise. Interestingly, the optimal order time may be earlier than that in the pre-committed strategy. By characterizing both strategies, we identify scenarios when time-flexible ordering can be mutually beneficial for the retailer and the supplier, leading to higher retailer's profits and supplier's revenues. In the high price volatility scenarios, order timing flexibility can be critical for sustaining the business between retailers and suppliers.

Keywords: Supply Chain Management, Stochastic inventory theory, Optimal stopping.

Suggested Citation

Gaur, Vishal and Osadchiy, Nikolay and Seshadri, Sridhar and Subrahmanyam, Marti G., Sourcing Strategies for Online Retail Marketplaces (December 2017). Available at SSRN: https://ssrn.com/abstract=2677045 or http://dx.doi.org/10.2139/ssrn.2677045

Vishal Gaur

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

HOME PAGE: http://www.johnson.cornell.edu/faculty/profiles/Gaur/

Nikolay Osadchiy (Contact Author)

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322
United States

HOME PAGE: http://www.bus.emory.edu/nosadch/

Sridhar Seshadri

University of Illinois at Urbana Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Indian School of Business ( email )

Hyderabad, Gachibowli 500 019
India

Marti G. Subrahmanyam

New York University (NYU) - Department of Finance ( email )

Stern School of Business,
44 West 4th Street, Suite 9-68
New York, NY 10012-1126
United States
212-998-0348 (Phone)
212-995-4233 (Fax)

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