Mitigating Spillover in Online Retailing via Replenishment

Abstract

Online purchases constitute about one tenth of US retail sales. The supply chains that support online retailing are fundamentally different from those that support traditional brick-and-mortar stores. Traditional solutions are not always appropriate to solve online retailing's operations problems; thus, there is an opportunity to understand and improve these novel supply chains. One key characteristic of the inventory systems for online retailing is demand spillover, whereby a stockout at a fulfillment center (FC) results in demand spilling over to another FC. For this context we examine how to allocate inventory to the FCs under a periodic-review joint-replenishment policy, with an objective to minimize outbound shipping costs for a fixed amount of inventory. We first show how traditional decentralized allocation policies may perform suboptimally and induce dynamics (whiplash) that result in costly spillover. We find that this phenomenon increases with the prevalence of local stockouts and with the level of inventory imbalance. We then describe why inventory imbalance occurs in online retailing due to operational realities and provide evidence based on real data. Finally, we propose a heuristic to allocate inventory accounting for possible spillover during the lead time. We test the heuristic by a simulation and show that it performs better than the status quo policy, is robust to operational realities, and captures over 90% of the possible improvement as compared to a pseudo-optimal policy.

Distribution-Free Inventory Risk Pooling in a Multilocation Newsvendor

“…Finally, our study can also be related to the growing literature in e-commerce inventory and fulfillment optimization. Acimovic and Graves (2017) show that decentralized inventory solutions can lead to costly spillover effects, and perform poorly compared to network-based policies. Govindarajan et al (2018) consider joint optimization of inventory and fulfillment decisions in an omnichannel setting where in-store demands cannot be flexibly fulfilled from other locations, whereas e-commerce demand can.…”

Item Aggregation and Column Generation for Online-Retail Inventory Placement

“…Some methods for solving the subsequent replenishment problem have been proposed. Acimovic (2012) and Acimovic and Graves (2017) consider the case with identical replenishment lead times, periodic review, and lost sales. They develop the projected base-stock policy, a heuristic that outperforms the status quo base-stock policy in its ability to mitigate persistent inventory imbalance and reduce outbound shipping costs.…”

Retail supply chain management: a review of theories and practices

“…This allows for greater flexibility in selecting the best location and transportation method to ship the products to meet the customer requirements while minimizing the fulfillment cost. Acimovic and Graves (2017) consider the fulfillment problem for a large distribution network of minimizing shipping costs for a single SKU, and propose an LP-based policy that incorporates the forecast of future orders. Xu et al (2009) consider a batch optimization policy where each single order fulfillment decision is delayed until solving the fulfillment for a batch of orders together using an integer programming.…”

“…DeValve et al (2018 extend the flexibility concept to online retailing by investigating a threshold policy with the structure which is motivated by the protection levels in revenue management originated from Littlewood (1972). Acimovic and Graves (2017) show how traditional decentralized allocation policies may perform sub-optimally and induce dynamics (whiplash) that result in costly spillover. The literature of fulfillment flexibility also shares some similar features with models from inventory transshipment literature.…”

“…To avoid high transportation cost, the fulfillment decision should not only look at the direct fulfillment cost (usually composed of transportation and processing cost) but also consider the future demand from the customers in order to fulfill orders strategically. Acimovic and Graves (2017) provide a good review of the current industry practice from an academic point of view.…”