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

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

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