An Empirical Examination of the Decision to Invest in Fulfillment Capabilities: A Study of Internet Retailers

34 Pages Posted: 14 Mar 2005

See all articles by Taylor Randall

Taylor Randall

University of Utah - School of Accounting and Information Systems

Serguei Netessine

The Wharton School, University of Pennsylvania

Nils Rudi

INSEAD - Technology and Operations Management

Date Written: March 2005

Abstract

Internet technology has allowed for a higher degree of de-coupling between the information-intensive sales process and the physical process of inventory management than its brick-and-mortar counterpart. As a result, some Internet retailers choose to outsource inventory and back-end operations in order to focus on the sales/marketing aspects of e-commerce. Nonetheless, a large number of retailers keep fulfillment capabilities in-house. In this paper we identify and test empirically factors that persuade firms to integrate inventory and fulfillment capabilities with virtual storefronts. Based on the extant literature and previous research in e-commerce, we formulate eight theoretical predictions. We then use data from a sample of over 50 public Internet retailers to test whether empirical data are consistent with these hypotheses. Finally, given the strategic importance and financial magnitude of the inventory investment decision, we analyze the effect of this decision on the ultimate financial success of Internet retailers.

We find that there are many circumstances in which it is prudent to own fulfillment capabilities and inventory. Empirical data are consistent with hypotheses that this tendency is higher for older firms selling small, high-margin products, offering lower levels of product variety and facing lower demand uncertainty. We also discover that firms making inventory ownership decisions that are consistent with theory and aligned with environmental and strategic factors are less likely to go bankrupt than those making misaligned inventory choices.

Keywords: Internet, supply chain, retailing, bankruptcy, e-commerce

JEL Classification: C21, C41, D92, L22, L81

Suggested Citation

Randall, Taylor and Netessine, Serguei and Rudi, Nils, An Empirical Examination of the Decision to Invest in Fulfillment Capabilities: A Study of Internet Retailers (March 2005). Simon School Working Paper No. CIS 05-05. Available at SSRN: https://ssrn.com/abstract=682503 or http://dx.doi.org/10.2139/ssrn.682503

Taylor Randall

University of Utah - School of Accounting and Information Systems ( email )

1645 Campus Center Drive
Salt Lake City, UT 84112
United States

Serguei Netessine (Contact Author)

The Wharton School, University of Pennsylvania ( email )

3730 Walnut Street
Philadelphia, PA 19104-6367
United States
(215) 573 3571 (Phone)

HOME PAGE: http://www.netessine.com

Nils Rudi

INSEAD - Technology and Operations Management ( email )

Boulevard de Constance
77 305 Fontainebleau Cedex
France

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