Impact of Stockout Compensation in E-Commerce Drop-Shipping Supply Chain

Using simulation modeling, our research is the first study to investigate impact of two different stockout compensation strategies (E-SC and S-SC) compared to no-stockout compensation strategy (N-SC) on supplier’s profits and etailer’s profits in e-commerce drop-shipping supply chain. The conceptual model is a two-echelon production-inventory system with a make-to-stock supplier and an etailer. The results from this study suggests that on average, the profit difference is less than 4.0 percent in E-SC compared to N-SC for both the supplier and etailer. However, when demand variability is high, production capacity is low and service level is low, the profit difference for both the supplier and etailer is significantly higher in E-SC compared to N-SC. Also, if both the supplier and etailer pursue S-SC strategy, then on average, an increase in wholesale price by around 1.0 percent compared to wholesale price in N-SC is sufficient to offset the stockout compensation cost for the supplier.