The Impact of Committing to Customer Orders in Online Retail

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