On-line Order Fulfillment Policies For A Retailer Of Seasonal Products

This paper studies a retailer who sells seasonal products in his two physical stores located in two separate areas. Despite satisfying the in-store demands, the retailer also accepts orders from the etailer through the Affiliate Program or drop-shipping to expand sales, and assigns one of his two stores to fulfill the orders. The revenue from the sale of one product through the network is shared by the retailer and the etailer, which makes it less profitable for the retailer to fulfill the on-line order than sell products to the in-store customers. So, when the inventory level is low and the on-line order is arriving, the retailer has to decide whether to accept the order or keep the product for the future in-store customer for higher profit? If the order is to be accepted, which store should be assigned to fulfill the order? It is a tradeoff of a smaller but certain revenue against a possibly large but uncertain one in the future. To answer the above two questions, a dynamic programming model is built to maximizing the future expected revenue, and an order-fulfillment policy is formed from the perspective of the expected revenue of one product of two physical stores in this paper. In addition, this paper also studies the retailer`s order-fulfillment policies under two scenarios: A. the two physical stores are of equal status which means when the on-line demand arrives, who would make higher expected revenue in the future will be assigned to fulfill the order; B. one store is identified as preferred supplier, which indicates that when the on-line demand arrives, the preferred supplier will be assigned to fulfill the order, if the preferred supplier denies, then the order be transferred to the backup supplier (the other store).