The Value of Logistic Flexibility in E-commerce

Abstract

Shipping experience improvement has been an essential business strategy in e-commerce. Beyond investing directly in improving shipping speed, online retailers have recently expanded their focus on other shipping strategies, such as offering consumers the option to pick up orders at a local station. This paper uses the opening of hundreds of such pick-up stations as a natural experiment to study the impact of these stations on consumers. We find that the introduction of pick-up stations has increased total sales by 3.9%. In contrast with past literature, we show that shipping time reduction is not the driving factor on the impact of pick-up stations. Yet, the logistic flexibility introduced by pick-up stations explains the sales impact. To explicitly examine how logistic flexibility affects consumers’ decisions on purchases, we develop and estimate a structural model of consumer choice. In our model, consumers value two types of logistics flexibility–the flexibility to pick up their items at their preferred time, denoted as the value of time flexibility, and the flexibility to delay pickup decisions until after packages arrive at a local station, denoted as the value of choice flexibility. We show that the value of time flexibility accounts for 76.2% of the impact on sales, while the value of choice flexibility accounts for the remaining 23.8%. Using our estimated model, we develop a counterfactual strategy in building pick-up stations that could achieve the sales lift with 56.4%-63.6% fewer stations. Last but not least, using our estimated time flexibility, we also develop a novel shipping strategy without pick-up stations that could improve sales by 8.4%. Our estimates suggest that our counterfactual logistic strategies could increase consumer welfare by 2.0%-10.0%.

Keywords: Online Retailing, Logistics Operations, Empirical Operations, Structural Estimation