Online or Offline: Fulfillment Priority for a Dual-Channel Supply Chain in an era of Volatility and Vulnerability

Abstract

Supply vulnerability and the associated shortage have been witnessed ubiquitously in an era of volatility, especially amid the recent pandemic. It mounts a big challenge to most manufacturers, especially for those who adopt dual channels selling their products through both retailers and their own online channels. As a proactive solution to address potential supply shortage, channel fulfillment priority (i.e., bestowing one particular channel with a fulfillment priority) plays a crucial strategical role. This paper develops a dual-channel supply chain model to study both the retailer’s ordering decisions and the manufacturer’s channel priority strategy in the presence of demand and yield uncertainties. When only the demand is uncertain, it is shown that (1) supply priority induces the retailer to raise her order quantity; (2) when the demand variance and yield are medium, the manufacturer is recommended to endow the retailer supply priority; (3) when the market share of online channel is not too high, the retail channel priority is shown to be a win-win strategy that reciprocally benefits both the manufacturer and the retailer; (4) if the channel priority can be selected ex-post the demand realization, then the manufacturer will always endow the online channel with supply priority. In addition, when both demand and yield are uncertain, it is further shown that (1) prioritizing the retailer raises the unit wholesale price and lowers the retailer’s order quantity when demand uncertainty is large; and (2) when the yield uncertainty is sufficiently high, the direct channel priority plays as a win-win solution. This study gleans numerous managerial insights that can be used to guide the decision-making on fulfillment priority, as a piece of supply chain resiliency.

Keywords: Dual-channel; Channel Fulfilment; Priority Strategy; Volatility and Vulnerability; Game Theory