Inventory control in the presence of an electronic marketplace

Abstract

This paper studies a periodic review inventory model in the presence of an electronic marketplace (EM). Emergency orders can be placed in the EM for additional cost, and excess inventory can be sold to the EM. When the order leadtime from the supplier is one period, the optimal inventory control policy is developed from a dynamic programming model of the problem. The policy is characterized by three critical inventory levels. When the order leadtime from the supplier is longer than one period, an EM policy is developed to determine the quantities of inventory to purchase from and sell to the EM in each period. Based on this EM policy, three ordering policies are proposed to determine the order quantity from the supplier. Numerical results show that significant cost reductions can be obtained by using the EM to adjust the inventory level in each period. The amount of cost reduction is greatly affected by system parameters, especially the order leadtime from the supplier and the costs for transactions in the EM.

Introduction

Propelled by the advances of information technologies, especially the spread of the Internet, electronic marketplaces (EMs) are growing at a high rate. The transaction volumes in EMs are expected to increase to around US $1.35 trillion in the United States, and US$ 2.4 trillion worldwide by 2004 (Keskinocak et al., 2001). Because EMs are not restricted by time and space, they can connect more companies, thus enriching buyers’ procurement choices and bringing more customers to sellers (Keskinocak et al., 2001). In an EM, “Companies can dispose of excessive inventory or procure needed inventory and build flexible supply chains” (Keskinocak and Tayur, 2001). As a result, it is possible for materials to flow from those companies with overstock to those with shortfall. Examples of EMs trading excessive inventory include TradeOut.com (Kaplan and Sawhney, 2000) Ingram Micro (Keskinocak and Tayur, 2001), USBid, Manheim Online, Gocargo (Grieger, 2003), etc.

EMs pose great opportunities for companies to improve their supply chain management and thus has aroused great interests from both the industrial and academic communities. Grieger (2003) provided a comprehensive review of EMs and argued that “the supply chain dimension of an EM is largely neglected and poorly managed.” Keskinocak and Tayur (2001) gave a thorough analysis of EMs and presented some examples illustrating opportunities provided by EMs to streamline companies’ supply chain management. Keskinocak et al. (2001) presented an application of a decision support system in an electronic marketplace of a European paper trading company. The decision support system could help its participants in making decisions concerning what to buy, what to sell and what to promote in the EM. Smith et al. (2001) reviewed the history of e-Commerce in the Airline industry and provided some research problems.

This paper studies an inventory control problem for a retailer. The retailer replenishes inventory from a supplier to satisfy stochastic demands from customers. When the current inventory cannot meet customers’ demand, products are purchased from an EM and if there is excessive inventory, the retailer can sell them in the EM. Purchasing from the EM usually takes shorter leadtime than ordering from the supplier. However, it is often more costly to replenish or dispose inventory through EM. Thus, purchasing and selling in the EM must be carefully considered. The EM considered in this paper represents a venue to do spot shop, where a company can obtain other companies’ inventory (e-inventory) as well as sell their excess inventory to satisfy demand requests posted online (e-order). Examples of such EMs include e-Steel and PaperExchange.com, etc. A detailed categorization of different types of EMs can be found in Kaplan and Sawhney (2000).

The system considered in this paper is similar to the inventory control system with two supply modes: regular and emergency. The problem of inventory control for the two supply modes inventory control system was first investigated by Barankin (1961), where two supply modes are available with leadtimes of one and zero period, respectively. Daniel (1963), Neuts (1964), Fukuda (1964) and Veinott (1966) also studied the two supply modes inventory control system. Whittmore and Saunders (1977) obtained the optimal inventory control policy when the regular leadtime is longer than the emergency leadtime by more than one period. However, the resulting optimal policy needs extensive computation and thus is too complex to implement. Other researchers, who studied inventory systems with two supply modes, include Chiang and Gutierrez, 1996, Chiang and Gutierrez, 1998, Chiang, 2001, Chiang, 2003, Tagaras and Vlachos (2001), Moinzadeh and Nahmias (1998), Moinzadeh and Schmidt (1991) and Johansen and Thorstenson (1998). The system considered in this paper differs from theirs in that the EM is not only a source of emergency supply, but also a place to sell off excessive inventory. The leadtime of purchasing from the EM is assumed to be zero. Considering that the system studied in this paper is complex than theirs, the optimal inventory control policy will be developed when the leadtime from the supplier is one period and heuristic policies are proposed for longer leadtime from the supplier.

The rest of the paper is organized as follows: In Section 2, the dynamic programming model for the inventory system with an EM is developed. Section 3 develops the optimal inventory control policy from the dynamic programming model of the problem when the order leadtime from the supplier is one period. When the leadtime is longer than one period, heuristic ordering policies are proposed, which will be discussed in Section 4. Results from numerical experiments are reported in Section 5.