Operation strategies for an omni-channel supply chain: Who is better off taking on the online channel and offline service?

https://doi.org/10.1016/j.elerap.2019.100918Get rights and content

Highlights

  • We explore the channel structure selection problem under the omni-channel retailing background.

  • We analyze the consumer service providing strategy of the omni-channel supply chain.

  • We design contracts to achieve the coordination of the omni-channel supply chain.

Abstract

The retail industry is accelerating the transition from multi-channel to omni-channel. A display showroom is a main mode of operation in omni-channel retailing. In this, consumers find products in an online channel, experience products and receive services in offline showrooms, and make a purchase by placing an order online or offline. In practice, the online channel (offline service) can be opened (invested in) by the manufacturer or the retailer. This paper explores the relevant issues by establishing and comparing four kinds of Stackelberg game models: (1) the manufacturer simultaneously opens an online channel and invests in the offline service (MM mode; (2) the manufacturer opens an online channel, but the retailer invests in the offline service (MR mode); (3) the retailer opens an online channel, but the manufacturer invests in the offline service (RM mode); and (4) the retailer simultaneously opens an online channel and invests in the offline service (RR mode). In these models, the online channel and offline channel cooperate through a display showroom. The results show that regardless of the kind of channel structure, a display showroom can generate benefits for the manufacturer, the retailer and the whole omni-channel supply chain. And from the perspectives of the manufacturer and the whole supply chain, if the consumer service perception degree is low, the price competition degree is high (low), and the service cooperation degree are high (low), and the MM (MR) mode is the optimal channel structure. Otherwise, if the consumer service perception degree is high, the RR mode is the most efficient channel structure for the manufacturer and the omni-channel supply chain. For the retailer, the RR mode is always the best channel structure. The improved revenue-sharing contract and two-part tariff contract can achieve full coordination of and improvement in the operational efficiency of the omni-channel supply chain and achieve Pareto improvement for the supply chain members.

Introduction

Along with the acceleration of technology evolution and the ongoing trend of digitalization, various channels, such as the Internet, mobile phones, and physical stores have become available for customers to interact with the retailers. However, traditionally, most multi-channel retailers have siloed structures, where the physical store division and the Internet store division operate independently of each other (Gallino and Moreno, 2014). Now, some brick-and-mortar retailers are exploring integration strategies for their offline and online channels to enrich the customer value proposition. As a result, achieving the integration of information and services from multiple available channels is becoming a high priority for retailers, representing a shift from a multi-channel to an omni-channel approach.

An omni-channel approach aims to coordinate the fragmented service processes and technologies in the various channels to deliver a consistent and integrated cross-channel experience for customers. In omni-channel retailing, consumers are becoming sophisticated enough to optimize their shopping experience by exhaustively considering all possible alternatives across all possible channels (Chopra, 2016). Firms provide better consumer experience by integrating advantageous resources online and offline, as well as adopting cross-channel cooperation. The collaboration projects include displays, services, advertisements, promotions, inventories, and logistics. Evidence shows that offline display showrooms (ODS) (Gao and Su, 2017a, Bell et al., 2018) is one of the main kinds of omni-channel retailing modes.

In traditional multi-channel retailing, the pure online-first retailers face significant challenges in communicating non-digital product attribute information to the customers (Bell et al., 2018). To improve online consumer shopping experiences, a large number of showrooms have been opened by e-retailers (Govindarajan et al., 2018). In the ODS mode, consumers can find products in the online channel, experience products and receive services in the offline showrooms, and make a purchase by placing an order online or offline. Displaying products in a showroom is one of the most common ways for online channel to convey product information to consumers. Showrooming has become a popular shopping behaviour, and 68% of American consumers have indicated that they visit showrooms occasionally (Statista, 2019). According to the ‘Research on Digital Consumers in China in 2017′ conducted by McKinsey1, integrated online and offline omni-channel shopping has become the mainstream consumption mode. Of the respondents, 93% experience electronic products in physical stores before making a purchase, whereas 41% and 39% have bought products directly in physical and virtual stores, respectively, after experiencing the products. That means, showrooms rapidly improve the shopping experiences of consumers and should be seen as opportunities rather than threats (Sit et al., 2018).

Xiaomi is one of the largest mobile phone retailers and internet brands in China. It sold products and provided consumer service through pure online channels before 2016. To improve the scale of sales and consumer shopping experiences, Xiaomi has opened many Official Experience Stores (OESs) and Xiaomi Authorized Online Channels (AOCs) in recent years. In addition, Xiaomi also has opened a large number of Xiaomi Authorized Experience Stores (AESs) in cooperation with its offline retailers. Two kinds of AESs cooperation modes exist: in the first, Xiaomi provides funding, and in the second, the offline retailers raise their own funds to build the service systems. By 2018, Xiaomi had opened 586 OESs, as well as having authorized 42 AOCs and 1378 AESs in China. (Fig. 1 is a screenshot of the Xiaomi website, which indicates the Xiaomi AESs opening situation in Beijing).

In the omni-channel sales process, Xiaomi publishes advertisements for its new products on its online channel (i.e., official website and AOCs). Then, consumers are encouraged to experience Xiaomi’s products in the offline channel (i.e., OESs and AESs). After experiencing the product, consumers can make an ‘offline’ purchase immediately or an ‘online’ purchase later. However, besides commodity displays, Xiaomi OESs and AESs also provide logistical distribution, inventory management, and after-sale services for Xiaomi’s online consumers. The omni-channel sales mode is win–win for both the online and offline channels. First, the powerful ‘flow effect’ of the online channel has attracted many consumers to the offline channel. Second, the ‘exhibition effect’ of the offline channel has eliminated consumers’ concerns about product quality when buying online. As a result, both online and offline sales volumes have increased. In the recent ‘Double 11 Festival’, which is the first so-called festival held since Xiaomi implemented its omni-channel new retailing strategy, Xiaomi has achieved a turnover of 5.2 billion yuan and has grown 113.8% year after year. Omni-channel retailing has offered Xiaomi’s consumers a better, high-quality shopping experience, as well as bringing great success to the company.

Realizing the importance of channel integration, companies other than Xiaomi have begun establishing omni-channel retailing. Pure play e-commerce firms, such as Amazon, Bonobos, and Warby Parker, are setting up physical stores to reduce shipping costs and improve shopping experiences (Bell et al., 2014), whereas brick-and-mortar firms such as Macy's and Walmart have integrated their online channels with their physical stores to leverage their existing networks of retail stores (Brynjolfsson et al., 2013). Alibaba (online retailer) and Suning (offline retailer), JD.COM (online retailer) and Walmart (offline retailer), Tmall (online retailer) and Freshhema (offline retailer) are changing from competition to cooperation to speed up the integration of online and offline channels, as well as to enhance supply chain competitiveness. The competition among omni-channel supply chains (referred to as OCSCs) tends to be hot (Brynjolfsson et al., 2013). Meeting the competition by optimizing their supply chain internal structures has become key for the firms.

As seen from the above practical cases and theoretical studies, omni-channel retailing, especially the use of showrooms, has become an important direction for enterprise transformation. In addition, various types of supply chain structural modes currently exist. A brand manufacturer can choose to build an online channel by themselves or by outsourcing to an offline retailer (Cai, 2010, Hsiao and Chen, 2014). The manufacturer can self-invest the offline service (display, advertising, promotion, distribution, after-sales, etc.) for the consumers or outsource it to the retailer (Li et al., 2016, Taleizadeh et al., 2016). The questions concerning this approach are as follows.

  • For omni-channel retailing, which kind of channel structure should be adopted?

  • Who should be responsible for opening (investing in) the online sales channel (offline channel service) in the omni-channel supply chain: the manufacturer or the retailer?

  • How can this new kind of supply chain (omni-channel supply chain) be coordinated?

Section snippets

Literature review

There are two streams of research closely related to our omni-channel configuration model. One stream selects the channel construction, service operation, and supply chain coordination of a multi-channel supply chain while the other investigates the omni-channel supply chain.

Model setup

Consider an OCSC that consists of one manufacturer M (She) and one retailer R (he). The offline sale channel r is always operated by the retailer. In contrast, the online sale channel e can be constructed by the manufacturer or the retailer (Hsiao and Chen, 2014). The manufacturer produces products at unit production cost c (as with Zhou et al. (2018), the unit production cost c is assumed to be 0). The products are sold to the retailer at wholesale price w (decision variable of the

Equilibrium analysis

Solving Eqs. (3), (4), (5), (6) by backward induction yields the equilibrium decisions of the different omni-channel modes that satisfy the following proposition.

  • Proposition 1

  • (i) When ΔMM=8(2θ2+3θ+1)-n2(2θ2β2+4θ2β+2θ2+4θβ2+4θβ+2θ+2β2+1)>0, the optimal equilibrium wholesale price, offline retail price, online retail price, and service level in the MM mode are respectively expressed as follows:

wMM=a(8(1+θ)(1+2θ)+(θ+2β(1+θ))(1-β)n2)16(2θ2+3θ+1)-2n2(2θ2β2+4θ2β+2θ2+4θβ2+4θβ+2θ+2β2+1)prMM=a((3β(1+θ)

Special case of n = 1

By observing Eqs. (7), (8), (9), (10), (11), (12), (13), (14), (15), (16), (17), (18), (19), (20), (21), (22), we note that when n = 1, only three exogenous parameters—a, β, and θ— are relevant to the operational decisions wrij,prij,peij,srij, market demands Drij,Deij,Dij, decision-makers’ profits πMij,πRij, and the whole supply chain’s profit πij in equilibrium state. In addition, wij,prij,peij,srij,Drij,Deij,Dij(πMij,πRij,πij) are all proportional in a(a2). That is, wija,p

Supply chain coordination

The above analysis indicates that a reasonable choice of channel structure modes is helpful for improving the operational efficiency of the OCSC. Nevertheless, numerous studies (Cachon and Lariviere, 2005, Boyaci, 2005, Chen et al., 2012) have shown that supply chain coordination is an effective way to eliminate the double marginal effect between the manufacturer and the retailer, improve the operational efficiency of the whole supply chain, and achieve a win-win situation for the supply chain

Summary

In recent years, we have seen significant growth in the use of omni-channel retailing. Increasing numbers of enterprises have begun to implement an omni-channel business, especially in the ODS mode, to improve the shopping experiences of consumers and to enhance the competitiveness of the supply chain. In the process of OCSC operations management, theoretical investigations of omni-channel usage behaviour from the perspectives of those who should be responsible for constructing the online

CRediT authorship contribution statement

Lu Liu: Conceptualization, Data curation, Formal analysis, Funding acquisition, Investigation, Methodology, Visualization, Writing - original draft, Writing - review & editing. Lipan Feng: Data curation, Formal analysis, Investigation, Methodology, Writing - review & editing. Bing Xu: Funding acquisition, Project administration, Resources, Software, Supervision, Writing - review & editing. Weisheng Deng: Conceptualization, Project administration, Resources, Software, Validation, Writing -

Declaration of Competing Interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

Acknowledgements

This work was supported by the National Natural Science Foundation of China (No. 71902105, No. 71561018 and No. 71702082) and Elite Talents Program of Shandong University of Science and Technology (No. 0104060540701).

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