Title: Investment timing for a dual channel supply chain

Authors: Yongma Moon; Tao Yao

Addresses: College of Business Administration, University of Seoul, Siripdae-gil 13, Dongdaemun-gu, Seoul, Korea ' Harold and Inge Marcus Department of Industrial and Manufacturing Engineering, The Pennsylvania State University, 349 Leonhard Building, University Park, PA 16802, USA

Abstract: A crucial question in a supply chain is whether to construct an internet channel in addition to a traditional retail channel. Despite many studies on this issue, little attention has been paid to optimal investment timing for developing the internet channel. To address this gap in the literature, this paper proposes a model to help a firm determine the timing by considering a firm's option value of waiting. Our model also incorporates customer's preference between the retail and the internet channel to derive total profits of the vertically integrated channels. Based on the proposed model, we study the impacts of cost uncertainty, sunk cost, cost efficiency and customer's behaviour on an investment timing strategy. In addition, the comparison study of a strategy by our proposed model and that by the widely used net present value method implies that the traditional method underestimates an investment of a dual channel and leads to suboptimal decisions of a firm. [Received: 30 March 2010; Revised: 24 January 2011; Revised: 21 July 2011; Accepted: 5 August 2011]

Keywords: cost uncertainty; sunk cost; cost efficiency; customer behaviour; channel integration; real options; investment timing; dual channel supply chains; supply chain management; SCM; internet channel; retail channel; dual channel valuation modelling.

DOI: 10.1504/EJIE.2013.052573

European Journal of Industrial Engineering, 2013 Vol.7 No.2, pp.148 - 174

Published online: 12 Mar 2013 *

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