Impact of supply chain power and drop-shipping on a manufacturer's optimal distribution channel strategy

Dennis Z. Yu, Tae Su Cheong, Daewon Sun

Research output: Contribution to journalArticlepeer-review

80 Citations (Scopus)


With the expansion of the Internet and the proliferation of e-businesses, many manufacturers have chosen to distribute products through online retail channels in addition to brick-and-mortar retail channels. In this paper, we consider a dual-channel supply chain in which a manufacturer considers selling a product through a conventional retail channel and an online channel. Considering two common procurement and order fulfillment policies for online retailers (etailers), conventional batch ordering and drop-shipping, we investigate the impact of supply chain power structure in terms of market power and retail channel dominance on a manufacturer's optimal distribution channel strategy. We analyze and compare the two procurement models with respect to the etailer's order fulfillment policies. We find that a manufacturer never prefers a drop-shipping etailer as the first mover in a sequential pricing game with a batch ordering traditional retailer. The manufacturer prefers to award the power of retail channel dominance to a batch ordering retailer with relatively high market power even if the etailer also follows a batch ordering policy. Drop-shipping benefits both the manufacturer and the etailer when the etailer has relatively low market power.

Original languageEnglish
Pages (from-to)554-563
Number of pages10
JournalEuropean Journal of Operational Research
Issue number2
Publication statusPublished - 2017 Jun 1


  • Competition
  • Drop-shipping
  • Power structure
  • Pricing
  • Supply chain

ASJC Scopus subject areas

  • Modelling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management


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