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

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