Author Information : Rong Li (Whitman School of Management, Syracuse University)
Year of Publication : Production and Operations Management (2020)
Summary of Findings : This paper characterizes the optimal inventory replenishment policy for retailers who implement the Ship-from-Store-to-Store (SFSTS) practice emerged in the omnichannel era, using stores also as shipping points to better fulfill customer demand from other nearby stores and online.
Research Questions : In the era of omnichannel, retailers like Best Buy are reinvesting their supply chains with the SFSTS practice, using stores also as shipping points. How should they replenish inventory for the regional distribution center and each store it covers periodically facing uncertain demand?
What we know : We know that the optimal replenishment policy for retailers under the SFSTS practice differs from what we know in the literature. This new form of policy requires constantly track every store’s on-hand inventory, updated its demand distribution, and estimate the optimal replenishment policy thresholds. We also know that it is much more complex to implement SFSTS with more nearby stores, despite the additional profit earned. So, retails should build their information systems to support such replenishment policy and be prepared for the operational complexity when expanding their SFSTS program.
Novel Findings : We characterize a new form of replenishment policy for retailers implementing the SFSTS practice. Different from the existing policies, it requires more central control and more information, e.g., it needs to use all stores' on-hand inventory to determine how to replenish each individual store.
Implications for Practice : As Omnichannel retailing becomes the new normal, especially during and after this Coronavirus pandemic, retails need to reinvent their supply chains and information systems to be rapid adaptive. To this end, the SFSTS is one of the effective programs to adopt; thus, understanding how to pull out this program optimally and how to grow it is vital for all retailers.
Full Citations : Li, R. 2020. Reinvent Retail Supply Chain: Ship-from-Store-to-Store. Production and Operations Management. Forthcoming.
Abstract : Retailers such as Best Buy are reinventing their supply chains for the era of Omnichannel with new strate- gies like ship-from-store-to-store (SFSTS) where stores are also used as shipping points. Under the SFSTS practice, to fill the demand (offline and online) from a customer region, two or more nearby stores of the retailers’ frequently replenish from each other as well as from a distribution center (DC) to better prepare inventory before the demand arrives. We study how to best replenish the DC and multiple nearby stores under this new practice using a multi-period inventory model with proactive transshipments. To the best of our knowledge, this paper is the first to solve this model, and the characterized optimal replenishment policy is valuable especially as it differs significantly from the past relevant literature on single-period models. In contrast, for the DC, although the procure-up-to policy is still optimal, the procure-up-to level is no longer constant but depends on all stores’ on-hand inventory. For each store, the optimal policy no longer remains the same structure but changes with whether the DC procures inventory from the supplier. When the DC procures inventory, the stores’ optimal policy is no longer single-threshold, but two-threshold (order-up-to and ship-down-to); and these thresholds decrease in any other store’s on-hand inventory. When the DC does not procure inventory, the stores ship between each other only when their inventories are imbalanced enough, and they ship until the benefit drops to just cover the shipping cost. Our results demonstrate that it is important to constantly track every store’s on-hand inventory and it is much more complex to implement SFSTS with more nearby stores, despite the additional profit earned.
This paper characterizes the optimal inventory replenishment policy for retailers who implement the Ship-from-Store-to-Store (SFSTS) practice emerged in the omnichannel era, using stores also as shipping points to better fulfill customer demand from other nearby stores and online.