Demand Pooling in Omnichannel Operations

Many traditional retailers and e-tailers like Walmart and Amazon have been implementing omnichannel strategies, such as buy-online pickup-at-store (BOPS), buy-online ship-to-store (BOSS), and buy-online ship-from-store (BOFS). We build a stylized model to investigate the impacts of these omnichannel strategies on store operations from an inventory perspective. We consider two segments of customers, namely, store-only customers who only make purchases offline, and omni-customers who strategically choose between offline and online channels. We show that BOPS may either benefit or hurt the retailer depending on his operational characteristics: the brick-and-mortar (B&M) store density (which determines the store visiting cost) and the online delivery efficiency (which determines the online waiting cost). When the online waiting cost is relatively low and the store visiting cost is even lower, BOPS will induce omni-customers to migrate from online purchasing to BOPS, leading to demand pooling at the B&M store. Such demand pooling provides two benefits for the retailer: 1) it reduces the overstocking cost (called the utilization enhancement effect) and 2) after inventory re-optimization, it results in a higher fill rate at the B&M store (called the availability improvement effect), which benefits existing customers and potentially attracts more customers to visit the B&M store. In contrast, when both the store visiting cost and the online waiting cost are relatively high, with the latter even higher, the introduction of BOPS results in demand depooling due to the migration of the omni-customers from offline purchasing to BOPS. After inventory re-optimization, this results in a lower fill rate, which forces out store-only customers and hurts the retailer. We also show that the roles played by BOPS for search and experience products are slightly different. Moreover, BOSS tends to mitigate the negative impact of demand depooling under BOPS due to the cost saving from last-mile delivery, whereas BOFS may amplify the beneficial pooling effect or the detrimental depooling effect under BOPS