Online retail is changing the way we shop and consume goods. For the first time in history, the total market share of online retail sales in the United States surpassed general merchandise sales earlier this year. Although buying online is convenient for consumers, who also demand speedy shipping and flexibility in where and how they can receive their goods or make returns, businesses and their supply chains have to adapt to meet these demands.
That’s where Simone Peinkofer, assistant professor of supply chain management, comes in.
“The new retail reality has led retailers to develop new fulfillment service operations, such as ‘buy online, pickup in store’ or ‘buy online, return in store,’ requiring the integration of physical and electronic retail channels. It’s also known as omni-channel retailing,” she said.
Peinkofer has been with the Broad College since 2016, and her research specialty covers omni-channel retail service operations.
Dynamics of drop-shipping
One area Peinkofer has explored is drop-shipping: how some manufacturers are delivering goods directly to consumers upon a retailer’s request and how that’s fundamentally changing the retail supply chain. Her paper “Assessing the Impact of Drop-Shipping Fulfillment Operations on the Upstream Supply Chain,” published earlier this year in the International Journal of Production Research, examined what’s known as the supply chain triad phenomenon.
Broad News: Can you explain what the supply chain triad phenomenon is?
Peinkofer: In general, a supply chain triad consists of supplier–buyer–customer. In the retailing context, this could be translated to a manufacturer–retailer–end customer, where the retailer can be a bridge to connect the other two parties. Traditionally, retailers were in charge of fulfilling end-customers’ orders.
However, in drop-shipping, the manufacturer is in charge of fulfilling end customers’ orders. While the end customer might purchase a fridge, for example, from Home Depot, the manufacturer — rather than Home Depot — is responsible for fulfilling and delivering the product to the end customer’s home. This shifts the bridge position from the retailer to the manufacturer.
So now, the manufacturer stands in direct contact with the end customer. End customers don’t necessarily know that the product is shipped by the manufacturer; they think the retailer is in charge of delivering the product. Thus, drop-shipping fundamentally changes the traditional relationships in a retail supply chain triad which lead to operational challenges for the manufacturer that we explored in this research.
Broad News: What challenges are manufacturers facing when establishing drop-shipping operations?
Peinkofer: Establishing drop-shipping operations takes a lot of coordination between the retailer and the manufacturer. Traditionally, manufacturers only had the necessary capabilities in place to fulfill demand from their retail customers which constitute freight orders of large lot-size quantities. Now, as more retailers are opting to set up drop-shipping operations, manufacturers need to develop the necessary capabilities to fulfill individual-sized orders.
This comes with a lot of operational challenges that manufacturers need to overcome to become efficient and effective at such operations. Remember that manufacturers need to make it look like the product is actually delivered by the retailer. This is an important aspect that emerged from our research which is very challenging for manufacturers if they have a lack of technological integration with the retailer.
Additionally, manufacturers need to provide the necessary fulfillment quality and consistency end customers would expect from the retailer. For example, individual end customer orders might come with customization requests; end customers might want a personal gift message to be attached. However, such services require additional time and resources for the fulfillment process that manufacturers are not used to. If something goes wrong in the fulfillment process, end customers are going to blame the retailer, not the manufacturer, since they think that the product is coming from the retailer.
Oftentimes — and our research showed this — retailers just decide to do drop-shipping without consulting the manufacturer’s capabilities, giving manufacturers limited to almost no time to get ready for those operational challenges.
Broad News: Which products are more likely to be drop-shipped?
Peinkofer: Not every product is suitable for drop-shipping, but heavy and bulky items are especially popular. Think about these items: retailers don’t want to hold them in their inventory, because holding inventory is a cost, plus heavy and bulky items take up a lot of space in the distribution center. Additionally, it might take special handling and equipment to unload, store and load these items back from a distribution aspect and retailers might not want to deal with the complex handling and storing of such products.
Using insights to save the sale
Peinkofer’s ongoing research seeks to understand how consumer insights can be used to inform retail supply chain strategy. She was a featured guest on the Be Epic podcast, produced by the Sam M. Walton College of Business at the University of Arkansas — her alma mater — to discuss the concept of “saving the sale.”
Broad News: What’s the major takeaway from your research on saving the sale?
Peinkofer: This research explores how consumers respond to two out-of-stock recovery strategies, delivery speed and delivery location convenience, in situations when a retailer is able to provide consumers with an unavailable product through a different channel (e.g., out of stock in the store but available online).
This research provides insights into how consumers respond to and evaluate a retailer’s stockout recovery strategy pertaining to different shopping situations. Despite the fact that omni-channel fulfillment is becoming the standard, a majority of retailers still struggle with the management of such service operations.
In a similar vein, a second research project takes a broader omni-channel view on when “save the sale” strategies are most effective, depending on various circumstantial factors (e.g., whether the out-of-stock occurs in store or online; price promoted vs. regularly priced products.) This work will provide managers with an understanding of more nuanced insights of when and how they can leverage their retail network to recover from a single stockout situation to retain consumers while highlighting the importance of inventory visibility. Having inventory visibility is probably one of the most important aspects if a retailer wishes to offer “save the sale” strategies.
Broad News: How does your work inform industry practices?
Peinkofer: I engage with industry professionals and closely follow retail industry news and developments to learn about current challenges and issues, which helps me come up with research questions that are managerially relevant and important. Sometimes I also work with companies directly to ensure my research is grounded in the industry and interesting to managers. For each research project, I come up with managerial implications that “translate” the academic nature of the research into something tangible for managers.
Most of the time, I am able to disseminate the knowledge I gained by talking to industry professionals. In September, I got invited by Supply Chain Brain, a leading industry publication, to speak on my “save the sale” work, for example.
Passion for supply chain
Ultimately, Peinkofer says she has found her passion. “Considering that consumers are an essential part of the retail supply chain, my research also directly impacts me since I am a consumer too, shopping at retail stores or online and experiencing firsthand some of the issues I am studying,” she said. “I love the creative process and natural curiosity that is necessary for my job to come up with relevant research questions and subsequently to be able to answer those questions.”
