The Impact of Committing to Customer Orders in Online Retail

41 Pages Posted: 7 Jul 2020 Last revised: 20 Sep 2021

See all articles by Gonçalo Figueira

Gonçalo Figueira

affiliation not provided to SSRN

Willem van Jaarsveld

Eindhoven University of Technology (TUE)

Pedro Amorim

Universidade do Porto

Jan C. Fransoo

Tilburg University - Tilburg University School of Economics and Management; Eindhoven University of Technology, Department of Industrial Engineering and Innovation Sciences

Date Written: July 2, 2020

Abstract

Online retailers are on a consistent drive to increase on-time delivery and reduce customer lead-time. However, in reality, an increasing share of consumers place orders early. Such Advance Demand Information can be deployed strategically to reduce costs and improve the customer service experience. This requires inventory and allocation policies that make optimal use of this information and that induce consumers to place their orders early.

Online retail has been growing steadily, and an increasing number of online retailers not only offer customers a choice of lead-time, but also actively back-order missing items from a consumer basket.

We develop new allocation policies that commit to a customer order upon arrival of the order rather than at the moment the order is due. We provide analytical results for the performance of these allocation policies and evaluate their behavior with real data from a large food retailer.

Our policy leads to a higher fill-rate at the expense of a slight increase in average delay. The analysis based on real-life data suggests a size-able impact that should impact current best practices in online retail.

With the changing landscape in online retail, customers are increasingly placing baskets of orders that they would like to receive at a planned and confirmed moment in time. Especially in grocery this has been growing fast. This fundamentally changes the strategic management of inventory. We demonstrate that online retailers should commit early to customer orders to enhance the customer service experience, and — eventually — to also create opportunities for reducing the cost of operations.

Keywords: online retail, inventory control, allocation policies, back-ordering

JEL Classification: M11

Suggested Citation

Figueira, Gonçalo and van Jaarsveld, Willem and Amorim, Pedro and Fransoo, Jan C., The Impact of Committing to Customer Orders in Online Retail (July 2, 2020). Available at SSRN: https://ssrn.com/abstract=3641875 or http://dx.doi.org/10.2139/ssrn.3641875

Gonçalo Figueira

affiliation not provided to SSRN

Willem van Jaarsveld

Eindhoven University of Technology (TUE) ( email )

PO Box 513
Eindhoven, 5600 MB
Netherlands

Pedro Amorim

Universidade do Porto ( email )

Rua Dr. Roberto Frias
4200-464 Porto
Portugal

Jan C. Fransoo (Contact Author)

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://https://www.tilburguniversity.edu/staff/jan-fransoo

Eindhoven University of Technology, Department of Industrial Engineering and Innovation Sciences ( email )

P.O. Box 513
Eindhoven, 5600 MB
Netherlands

HOME PAGE: http://www.tue.nl/staff/j.c.fransoo

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