The news-vendor problem with drop-shipping and resalable returns

Abstract

As e-commerce expands, more and more products are offered online to attract internet consumers’ interest. These products are then shipped to consumers’ home by a drop-shipper. Drop-shipping seems to be a good option to sell products in addition to physical stores. Furthermore, both types of products, either sold in store or on Internet can be returned by consumers, with often a higher return ratio for those purchased on Internet. To model these two sales channel and the interactions between them, we consider a News-Vendor (NV) managing both a physical store and an online sale channel that can be fulfilled by a drop-shipping option. We also consider the possibility of reselling products that are returned by consumers during the selling season. The concavity of the expected profit is proven and the optimality condition is obtained. Promising results are obtained from a numerical analysis. In particular, we show that the expected profit can be 14.4% less than the optimal expected profit if the return effect is ignored. Using drop-shipping option can reduce the optimal store inventory by 31.2% and if the NV has no drop-shipping option, the expected profit can be 9% less.

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