Channel Integration, Sales Dispersion, and Inventory Management

TLDR

The study examines how introducing cross‑channel ship‑to‑store functionality affects retailers’ sales dispersion and inventory management. Using data from a leading U.S. retailer that added free ship‑to‑store, the authors test the hypothesis that this feature increases sales dispersion and calibrate conventional inventory‑ordering models to assess inventory responses. They find that the share of the 90 % lowest‑selling products in total sales rose by 0.75 percentage points, raising dispersion, and that optimal inventory would require cycle and safety stock increases of about 2.7 %.

Abstract

We study the effects of the introduction of cross-channel functionalities on the overall sales dispersion of retailers and the implications of these effects for inventory management. To do that, we analyze data from a leading U.S. retailer who introduced a “ship-to-store” (STS) functionality that allows customers to ship products to their local store free of charge when those products are not available in their local store. Based on the fact that stores prioritize carrying products for which local demand is high, we test the hypothesis that introducing the STS functionality increased the retailer’s overall sales dispersion. We find that, on average, the contribution of the 90% lowest-selling products to total sales increased by 0.75 percentage points, increasing sales dispersion. Calibrating conventional inventory-ordering models, we show that to respond optimally to the observed increase in dispersion, the retailer would need to increase its cycle and safety inventories by approximately 2.7%. Our paper points out the effect of an increasingly important retail phenomenon (channel integration) on a key factor for inventory management (sales dispersion). This paper was accepted by Vishal Gaur, operations management.