Joint inventory and distribution strategy for online sales with a flexible delivery option

Abstract

This paper develops a strategy to jointly optimize the inventory and distribution for an online sales firm. The firm has to decide how to distribute the products from its warehouse to customers: this can either be done by using a company-owned vehicle, or by outsourcing to a third-party transportation company. The online sales environment includes a flexible delivery option that gives a discount to customers in return. This option is offered when the inventory level in the warehouse is lower than a threshold level. Customers accepting flexible delivery pay a deposit at the time they place the order and pay the remaining reduced price at the time of delivery. By offering the flexible delivery option, the firm aims to reduce the cost of distribution to the customers as well as postpone the timing of paying an outside supplier for stock replenishment. Additionally, this allows the firm to use on hand stock effectively to respond to more urgent customer requests. As the timing of cash-flows are dependent on the customer behaviour and the inventory and distribution strategy, the profit function is the Net Present Value of future cash-flows. We analyze the benefit of flexible delivery to the firm and perform sensitivity analysis with respect to various parameters. The profitability of flexible delivery depends on price setting and customer behaviour. Flexible delivery, in this model, has great potential to reduce transport distances and emissions when firms use their own vehicles.

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ORCID for Patrick Beullens: orcid.org/0000-0001-6156-3550

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