Sourcing Strategies for Online Retail Marketplaces

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.