Document Type
Journal article
Source Publication
European Journal of Operational Research
Publication Date
10-16-2013
Volume
230
Issue
2
First Page
272
Last Page
230
Publisher
Elsevier BV
Keywords
Profit margin; Contingent free-shipping; Inventory; Simulation with Arena; Optimization with OptQuest; Sensitivity analysis
Abstract
We consider a two-stage decision problem, in which an online retailer first makes optimal decisions on his profit margin and free-shipping threshold, and then determines his inventory level. We start by developing the retailer’s expected profit function. Then, we use publicly-available statistics to find the best-fitting distribution for consumers’ purchase amounts and the best-fitting function for conversion rate (i.e., probability that an arriving visitor places an online order with the retailer). We show that: (i) a reduction of the profit margin does not significantly affect the standard deviation of consumers’ order sizes (purchase amounts) but increases the average order size; whereas, (ii) variations in a positive finite free-shipping threshold affect both the average value and the standard deviation of the order sizes. We then use Arena to simulate the online retailing system and OptQuest to find the retailer’s optimal decisions and maximum profit. Next, we perform a sensitivity analysis to examine the impact of the ratio of the unit holding and salvage cost to the unit shipping cost on the retailer’s optimal decisions. We also draw some important managerial insights.
DOI
10.1016/j.ejor.2013.04.006
Print ISSN
03772217
E-ISSN
18726860
Publisher Statement
Copyright © 2013 Elsevier B.V. All rights reserved. Access to external full text or publisher's version may require subscription.
Full-text Version
Accepted Author Manuscript
Language
English
Recommended Citation
Becerril-Arreola, R., Leng, M., & Parlar, M. (2013). Online retailers’ promotional pricing, free-shipping threshold, and inventory decisions: A simulation-based analysis. European Journal of Operational Research, 230(2), 272-283. doi: 10.1016/j.ejor.2013.04.006