The effect of the fast-ship option in retail supply chains

Abstract

To reduce loss of sales caused by demand uncertainty, retailers can offer a fast-ship option to customers who experience stockout. The fast-ship option is a common practice that serves as a secondary source of supply. When this option is offered, the supply chain partners arrange to have out-of-stock items shipped directly from the supplier to willing customers at no additional cost to the customers. The fast-ship option serves as a mechanism by which inventory risk can be shared between the retailer and the supplier. We investigate the retailer's and the supplier's interactions when the fast-ship option is offered under different scenarios. More specifically, we characterize the supplier's and the retailer's ordering policies and investigate how the supplier and the retailer react to different levels of participation for fast-ship orders. We also study how the supplier can manage its risk by using either price markup or supply commitment under different supply contract structures. In addition, when the fast-ship option is offered, we investigate how alliance or competition between retailers can affect the profitability of the supplier and retailers.