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Supply chain coordination with inventory risk allocation

  • School of Management, University of Science and Technology of China, Hefei 230026, China

Cite this:
https://doi.org/10.52396/JUSTC-2023-0134
More Information
  • Author Bio:

    Qingyi Wu is a postgraduate student at School of Management, University of Science and Technology of China. Her research mainly focuses on supply chain management and information sharing

    Shuang Xie is a postgraduate student at School of Management, University of Science and Technology of China. His research mainly focuses on multiproduct firm decision-making and customization

  • Corresponding author: E-mail: xieshuang@mail.ustc.edu.cn
  • Received Date: 06 September 2023
  • Accepted Date: 06 November 2023
    Abstract

  • Abstract

    Unlike the traditional decentralized channel, the drop-shipping channel entails a retailer relaying consumers' orders to the manufacturer, which proceeds to stock the orders and directly ship them to the consumers. This study explores supply chain coordination and product quality in drop-shipping and traditional channels. Specifically, we analyze the performance of both channels under wholesale price and revenue-sharing contracts. Our study yields several key findings. First, the revenue-sharing contract can coordinate both traditional and drop-shipping channels, effectively increasing supply chain performance. Second, given the channel structure, the retailer prefers the wholesale price contract, whereas the manufacturer prefers the revenue-sharing contract. Third, product quality is higher in the drop-shipping channel when demand uncertainty is high. Finally, the implementation of the revenue-sharing contract increases product quality in the traditional channel, whereas it keeps product quality unchanged in the drop-shipping channel.

    Graphical abstract

    The research framework of supply chain coordination.

    Abstract

    Unlike the traditional decentralized channel, the drop-shipping channel entails a retailer relaying consumers' orders to the manufacturer, which proceeds to stock the orders and directly ship them to the consumers. This study explores supply chain coordination and product quality in drop-shipping and traditional channels. Specifically, we analyze the performance of both channels under wholesale price and revenue-sharing contracts. Our study yields several key findings. First, the revenue-sharing contract can coordinate both traditional and drop-shipping channels, effectively increasing supply chain performance. Second, given the channel structure, the retailer prefers the wholesale price contract, whereas the manufacturer prefers the revenue-sharing contract. Third, product quality is higher in the drop-shipping channel when demand uncertainty is high. Finally, the implementation of the revenue-sharing contract increases product quality in the traditional channel, whereas it keeps product quality unchanged in the drop-shipping channel.

    • Public Summary

    • The study explores the supply chain coordination and product quality problems with different inventory risk allocations.
    • The revenue-sharing contract can coordinate both the traditional and drop-shipping channels, but the retailer and manufacturer have distinct preferences.
    • The product quality exhibits varying performance across different channels and contracts.

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    • References(31)
  • [1]
    Khouja M. The evaluation of drop shipping option for e-commerce retailers. Computers & Industrial Engineering, 2001, 41 (2): 109–126. doi: 10.1016/S0360-8352(01)00046-8
    [2]
    Ma S, Jemai Z, Sahin E, et al. The news-vendor problem with drop-shipping and resalable returns. International Journal of Production Research, 2017, 55 (22): 6547–6571. doi: 10.1080/00207543.2017.1324221
    [3]
    AppScenic. 30+ dropshipping and ecommerce key statistics, market size, growth. Retrieved March 21, 2023. https://appscenic.com/dropshipping-and-ecommerce-key-statistics/#27 of online retailers are now dropshipping, 2022 .
    [4]
    Grand View Research. Dropshipping market size, share & trends analysis report by product type, region, and segment forecasts, 2023–2030. Retrieved March 21, 2023. https://www.grandviewresearch.com/industry-analysis/dropshipping-market, 2022 .
    [5]
    Cachon G P. Supply chain coordination with contracts. In: Handbooks in Operations Research and Management Science. Amsterdam: Elsevier, 2003 , 11: 227–339.
    [6]
    Bart N, Chernonog T, Avinadav T. Revenue-sharing contracts in supply chains: A comprehensive literature review. International Journal of Production Research, 2021, 59 (21): 6633–6658. doi: 10.1080/00207543.2020.1821929
    [7]
    Cachon G P. The allocation of inventory risk in a supply chain: Push, pull, and advance-purchase discount contracts. Management Science, 2004, 50 (2): 222–238. doi: 10.1287/mnsc.1030.0190
    [8]
    Netessine S, Rudi N. Supply chain choice on the Internet. Management Science, 2006, 52 (6): 844–864. doi: 10.1287/mnsc.1060.0512
    [9]
    Davis A M, Katok E, Santamaría N. Push, pull, or both? A behavioral study of how the allocation of inventory risk affects channel efficiency. Management Science, 2014, 60 (11): 2666–2683. doi: 10.1287/mnsc.2014.1940
    [10]
    Shi S, Sun J, Cheng T C E. Wholesale or drop-shipping: Contract choices of the online retailer and the manufacturer in a dual-channel supply chain. International Journal of Production Economics, 2020, 226: 107618. doi: 10.1016/j.ijpe.2020.107618
    [11]
    Ha A Y, Tong S, Wang Y. Channel structures of online retail platforms. Manufacturing & Service Operations Management, 2021, 24 (3): 1547–1561. doi: 10.1287/msom.2021.1011
    [12]
    Lei J, Xue M. Drop-shipping or batch ordering: Contract choice in the presence of information sharing and quality decision. Journal of Management Science and Engineering, 2022, 7 (2): 287–302. doi: 10.1016/j.jmse.2021.11.002
    [13]
    Ma B, Zhang W, Chen Y. Inventory risk allocation in the presence of sales effort. HKUST Business School Research Paper, 2022 , 2022 (067). Available at SSRN: https://ssrn.com/abstract=4148091.
    [14]
    Wang Y, Jiang L, Shen Z. Channel performance under consignment contract with revenue sharing. Management Science, 2004, 50 (1): 34–47. doi: 10.1287/mnsc.1030.0168
    [15]
    Cachon G P, Lariviere M A. Supply chain coordination with revenue-sharing contracts: strengths and limitations. Management Science, 2005, 51 (1): 30–44. doi: 10.1287/mnsc.1040.0215
    [16]
    Huang G, Liu L. Supply chain decision-making and coordination under price-dependent demand. Journal of Systems Science & Systems Engineering, 2006, 15: 330–339. doi: 10.1007/s11518-006-5022-6
    [17]
    Cheng Y, Zhou Y. Supply chain coordination with buy back contract under risk constraints. Journal of University of Science and Technology of China, 2011, 41 (3): 274–282. doi: 10.3969/j.issn.0253-2778.2011.03.014
    [18]
    Giri B C, Bardhan S, Maiti T. Coordinating a two-echelon supply chain through different contracts under price and promotional effort-dependent demand. Journal of Systems Science & Systems Engineering, 2013, 22: 295–318. doi: 10.1007/s11518-013-5222-9
    [19]
    Zhang Y, Donohue K, Cui T H. Contract preferences and performance for the loss-averse supplier: Buyback vs. revenue sharing. Management Science, 2016, 62 (6): 1734–1754. doi: 10.1287/mnsc.2015.2182
    [20]
    Lan C, Bi G, Fei Y. Supply chain with wholesale price contract under inequity aversion and random yield. Journal of University of Science and Technology of China, 2017, 47 (6): 530–540. (in Chinese) doi: 10.3969/j.issn.0253-2778.2017.06.012
    [21]
    Jeuland A P, Shugan S M. Managing channel profits. Marketing Science, 1983, 2 (3): 239–272. doi: 10.1287/mksc.2.3.239
    [22]
    Economides N. Quality choice and vertical integration. International Journal of Industrial Organization, 1999, 17 (6): 903–914. doi: 10.1016/S0167-7187(97)00063-5
    [23]
    Xu X. Optimal price and product quality decisions in a distribution channel. Management Science, 2009, 55 (8): 1347–1352. doi: 10.1287/mnsc.1090.1023
    [24]
    Zhu L, You J. Moral hazard strategy and quality contract design in a two-echelon supply chain. Journal of Systems Science & Systems Engineering, 2011, 20: 70–86. doi: 10.1007/s11518-011-5153-2
    [25]
    Shi H, Liu Y, Petruzzi N C. Consumer heterogeneity, product quality, and distribution channels. Management Science, 2013, 59 (5): 1162–1176. doi: 10.1287/mnsc.1120.1604
    [26]
    Ha A, Long X, Nasiry J. Quality in supply chain encroachment. Manufacturing & Service Operations Management, 2016, 18 (2): 280–298. doi: 10.1287/msom.2015.0562
    [27]
    Jerath K, Kim S-H, Swinney R. Product quality in a distribution channel with inventory risk. Marketing Science, 2017, 36 (5): 747–761. doi: 10.1287/mksc.2017.1041
    [28]
    Qingyi Wu, Shuang Xie, Buqing Ma. Inventory allocation and product quality. Working Paper, 2023 .
    [29]
    Aycock J. A brief history of just-in-time. ACM Computing Surveys (CSUR), 2003, 35 (2): 97–113. doi: 10.1145/857076.857077
    [30]
    Gümüs M, Ray S, Yin S. Returns policies between channel partners for durable products. Marketing Science, 2013, 32 (4): 622–643. doi: 10.1287/mksc.2013.0784
    [31]
    Kong G, Rajagopalan S, Zhang H. Revenue sharing and information leakage in a supply chain. Management Science, 2013, 59 (3): 556–572. doi: 10.1287/mnsc.1120.1627
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    Figure  1.  Preferred mode for the manufacturer and supply chain.

    Figure  2.  Preferred mode for the retailer.

    [1]
    Khouja M. The evaluation of drop shipping option for e-commerce retailers. Computers & Industrial Engineering, 2001, 41 (2): 109–126. doi: 10.1016/S0360-8352(01)00046-8
    [2]
    Ma S, Jemai Z, Sahin E, et al. The news-vendor problem with drop-shipping and resalable returns. International Journal of Production Research, 2017, 55 (22): 6547–6571. doi: 10.1080/00207543.2017.1324221
    [3]
    AppScenic. 30+ dropshipping and ecommerce key statistics, market size, growth. Retrieved March 21, 2023. https://appscenic.com/dropshipping-and-ecommerce-key-statistics/#27 of online retailers are now dropshipping, 2022 .
    [4]
    Grand View Research. Dropshipping market size, share & trends analysis report by product type, region, and segment forecasts, 2023–2030. Retrieved March 21, 2023. https://www.grandviewresearch.com/industry-analysis/dropshipping-market, 2022 .
    [5]
    Cachon G P. Supply chain coordination with contracts. In: Handbooks in Operations Research and Management Science. Amsterdam: Elsevier, 2003 , 11: 227–339.
    [6]
    Bart N, Chernonog T, Avinadav T. Revenue-sharing contracts in supply chains: A comprehensive literature review. International Journal of Production Research, 2021, 59 (21): 6633–6658. doi: 10.1080/00207543.2020.1821929
    [7]
    Cachon G P. The allocation of inventory risk in a supply chain: Push, pull, and advance-purchase discount contracts. Management Science, 2004, 50 (2): 222–238. doi: 10.1287/mnsc.1030.0190
    [8]
    Netessine S, Rudi N. Supply chain choice on the Internet. Management Science, 2006, 52 (6): 844–864. doi: 10.1287/mnsc.1060.0512
    [9]
    Davis A M, Katok E, Santamaría N. Push, pull, or both? A behavioral study of how the allocation of inventory risk affects channel efficiency. Management Science, 2014, 60 (11): 2666–2683. doi: 10.1287/mnsc.2014.1940
    [10]
    Shi S, Sun J, Cheng T C E. Wholesale or drop-shipping: Contract choices of the online retailer and the manufacturer in a dual-channel supply chain. International Journal of Production Economics, 2020, 226: 107618. doi: 10.1016/j.ijpe.2020.107618
    [11]
    Ha A Y, Tong S, Wang Y. Channel structures of online retail platforms. Manufacturing & Service Operations Management, 2021, 24 (3): 1547–1561. doi: 10.1287/msom.2021.1011
    [12]
    Lei J, Xue M. Drop-shipping or batch ordering: Contract choice in the presence of information sharing and quality decision. Journal of Management Science and Engineering, 2022, 7 (2): 287–302. doi: 10.1016/j.jmse.2021.11.002
    [13]
    Ma B, Zhang W, Chen Y. Inventory risk allocation in the presence of sales effort. HKUST Business School Research Paper, 2022 , 2022 (067). Available at SSRN: https://ssrn.com/abstract=4148091.
    [14]
    Wang Y, Jiang L, Shen Z. Channel performance under consignment contract with revenue sharing. Management Science, 2004, 50 (1): 34–47. doi: 10.1287/mnsc.1030.0168
    [15]
    Cachon G P, Lariviere M A. Supply chain coordination with revenue-sharing contracts: strengths and limitations. Management Science, 2005, 51 (1): 30–44. doi: 10.1287/mnsc.1040.0215
    [16]
    Huang G, Liu L. Supply chain decision-making and coordination under price-dependent demand. Journal of Systems Science & Systems Engineering, 2006, 15: 330–339. doi: 10.1007/s11518-006-5022-6
    [17]
    Cheng Y, Zhou Y. Supply chain coordination with buy back contract under risk constraints. Journal of University of Science and Technology of China, 2011, 41 (3): 274–282. doi: 10.3969/j.issn.0253-2778.2011.03.014
    [18]
    Giri B C, Bardhan S, Maiti T. Coordinating a two-echelon supply chain through different contracts under price and promotional effort-dependent demand. Journal of Systems Science & Systems Engineering, 2013, 22: 295–318. doi: 10.1007/s11518-013-5222-9
    [19]
    Zhang Y, Donohue K, Cui T H. Contract preferences and performance for the loss-averse supplier: Buyback vs. revenue sharing. Management Science, 2016, 62 (6): 1734–1754. doi: 10.1287/mnsc.2015.2182
    [20]
    Lan C, Bi G, Fei Y. Supply chain with wholesale price contract under inequity aversion and random yield. Journal of University of Science and Technology of China, 2017, 47 (6): 530–540. (in Chinese) doi: 10.3969/j.issn.0253-2778.2017.06.012
    [21]
    Jeuland A P, Shugan S M. Managing channel profits. Marketing Science, 1983, 2 (3): 239–272. doi: 10.1287/mksc.2.3.239
    [22]
    Economides N. Quality choice and vertical integration. International Journal of Industrial Organization, 1999, 17 (6): 903–914. doi: 10.1016/S0167-7187(97)00063-5
    [23]
    Xu X. Optimal price and product quality decisions in a distribution channel. Management Science, 2009, 55 (8): 1347–1352. doi: 10.1287/mnsc.1090.1023
    [24]
    Zhu L, You J. Moral hazard strategy and quality contract design in a two-echelon supply chain. Journal of Systems Science & Systems Engineering, 2011, 20: 70–86. doi: 10.1007/s11518-011-5153-2
    [25]
    Shi H, Liu Y, Petruzzi N C. Consumer heterogeneity, product quality, and distribution channels. Management Science, 2013, 59 (5): 1162–1176. doi: 10.1287/mnsc.1120.1604
    [26]
    Ha A, Long X, Nasiry J. Quality in supply chain encroachment. Manufacturing & Service Operations Management, 2016, 18 (2): 280–298. doi: 10.1287/msom.2015.0562
    [27]
    Jerath K, Kim S-H, Swinney R. Product quality in a distribution channel with inventory risk. Marketing Science, 2017, 36 (5): 747–761. doi: 10.1287/mksc.2017.1041
    [28]
    Qingyi Wu, Shuang Xie, Buqing Ma. Inventory allocation and product quality. Working Paper, 2023 .
    [29]
    Aycock J. A brief history of just-in-time. ACM Computing Surveys (CSUR), 2003, 35 (2): 97–113. doi: 10.1145/857076.857077
    [30]
    Gümüs M, Ray S, Yin S. Returns policies between channel partners for durable products. Marketing Science, 2013, 32 (4): 622–643. doi: 10.1287/mksc.2013.0784
    [31]
    Kong G, Rajagopalan S, Zhang H. Revenue sharing and information leakage in a supply chain. Management Science, 2013, 59 (3): 556–572. doi: 10.1287/mnsc.1120.1627
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