Inventory rationing via drop-shipping in Internet retailing: A sensitivity analysis

In this paper, we study a threshold level inventory rationing policy that is of interest to e-tailers, operating in a business to consumer (B2C) environment and selling non-perishable, made-to-stock items such as books, CDs, consumer electronics, and body and bath products. A Monte Carlo simulation model is developed to examine this policy when the demand process is stochastic, lead-time is stochastic, and the e-tailer uses ‘drop-shipping’ as an order fulfillment option. The methodology presented, which includes computer simulation and a full factorial experimental design, permits understanding of the complexity of the decision-making environment and implications of different sources of uncertainty (e.g. demand variability and lead-time variability) on a profit-maximizing threshold level of inventory, a stock level below which low margin orders are drop-shipped directly from the e-tailer’s supplier rather than fulfilled from internal stock.