Demand Pooling in Omnichannel Operations

Both traditional retailers and e-tailers have been implementing omnichannel strategies such as buy online, pick up at store (BOPS). We build a stylized model to investigate the impact of the BOPS initiative 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 two fundamental system primitives: the store visiting cost and the online waiting cost. If the online waiting cost is relatively low and the store visiting cost is even lower, BOPS can induce omni-customers to migrate from online buying to BOPS, leading to demand pooling at the brick-and-mortar (B&M) store. Such demand pooling provides two benefits for the retailer: it reduces the overstocking cost, and after inventory reoptimization, it results in a higher fill rate at the B&M store, which benefits existing customers and potentially attracts more customers to the store. In contrast, if both store visiting and online waiting costs are relatively high with the latter even higher, introducing BOPS can result in demand depooling as a result of the migration of the omni-customers from offline purchasing to BOPS. This leads to a lower fill rate after inventory reoptimization, likely the result of a lower profit margin under BOPS, which turns away store-only customers and hurts the retailer.

Automated summary

The success of the BOPS initiative depends on the relative costs of store visiting and online waiting. When the store visiting cost is lower and the online waiting cost is higher, BOPS can attract more customers to the brick-and-mortar store, leading to a higher fill rate and potential customer attraction. Conversely, if both costs are high, introducing BOPS may result in demand dispersion, lower fill rates, and decreased profit margins for the retailer.