Title: When should supply chain members adopt drop-shipping channel?

Authors: Zilin Chen, Zigang Zhang

Addresses: Department of Management Science and Engineering, College of Management, Huazhong University of Science and Technology, 1037 Luoyu Road, Wuhan 430074, People's Republic of China. ' Department of Management Science and Engineering, College of Management, Huazhong University of Science and Technology, 1037 Luoyu Road, Wuhan 430074, People's Republic of China

Abstract: There are many excellent features about drop-shipping. However, the focus of this article is on analysing how drop-shipping will affect the supply chain members| payoffs, and hence their incentive to adopt drop-shipping. So, we are interested in finding answers to the following questions: how will the supply chain members| payoffs be affected when moving from traditional channel to drop-shipping channel? Will anyone be worse or better off, or can everyone be better off? Under what conditions will they be worse or better off? We find the cases under which retailer and vendor, both agree to adopt the drop-shipping channel. Sometimes, even if supply chain total expected payoff is smaller in drop-shipping channel than in the traditional channel, it is still possible for them to achieve Pareto improving payoffs by adopting drop-shipping channel, provided that risk sharing is allowed.

Keywords: channel choice; drop shipping; inventory risk; Pareto improvement; profit sharing; risk sharing; supply chain management; SCM.

DOI: 10.1504/IJLSM.2008.019188

International Journal of Logistics Systems and Management, 2008 Vol.4 No.6, pp.728 - 745

Published online: 02 Jul 2008 *

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