‘Buy online and pick up in-store’: Implications for the store inventory

Highlights

• Inventory policy of a store in ‘Buy online and pick up in-store’ context has been studied.

• Inventory policies are proposed for both single and separate ownership of channels.

• Policies for favoring walk-in orders in presence of revenue-sharing have been discussed.

• The insights should help the store select the most appropriate inventory policy.

Abstract

‘Buy online and pick up in-store’ (BOPS), wherein a customer buys the product online and picks it up from the physical store at her convenience, is fast gaining popularity. However, BOPS service complicates the store's inventory policy as BOPS orders, while waiting to be picked up, block inventory and thus delay replenishment requests. The store now has to maintain a base-stock level that is optimal considering both walk-in and BOPS orders. We discuss an inventory control policy that suits this situation. The problem is accentuated when the online channel and the physical store are under different ownerships, since the revenue from BOPS orders will now get shared between the two. In such a scenario, the store may opt for an inventory policy that favours walk-in orders over BOPS requests, as every BOPS order fetches less revenue than every walk-in customer. The extent of restriction on BOPS orders will depend on the revenue-sharing policy and also on the relative frequencies of walk-in and BOPS demands. We discuss two inventory policies that can help the store prioritize walk-in demands over BOPS demands. We compare the performances of the policies proposed, and show that each policy has its claim to supremacy over others in different operating environments, characterized by the input parameters.

Introduction

In today's increasingly competitive world of retailing, the retailers are trying to attract and retain customers by providing them with enriched shopping experience. For many of them, provisioning of omnichannel services is a step in that direction (Brynjolfsson et al., 2013; Cai and Lo, 2020). An omnichannel service allows the customer a seamless journey across different channels – both physical and digital – to best suit her purpose, thereby enhancing her shopping convenience (Deloitte, 2017; Park et al., 2020; Rigby, 2011). ‘Buy online and pick up in-store’ (BOPS) is one such service wherein a customer uses the online channel to complete purchase formalities, including payment, for a product that is currently available at a participating physical store convenient for her. The item gets reserved and waits in the store inventory for the customer to pick it up at her convenience. Flexibility offered by BOPS service to pick up online orders from physical stores has been a win-win strategy for both customers and retailers. The customer avoids stock-out risk at the store by booking the item beforehand (Bell et al., 2014). Also, since the customer can pick up the order at her will and does not have to wait for delivery by mail, gratification is expedited (Barr, 2018). In a study recently conducted by Doodle, 68% of US adults have been found to opt for BOPS fulfilment (Koetsier, 2019). The retailer, on the other hand, saves on the shipping costs (Bhattacharyya, 2019; Ganatra, 2018). The physical store also expects to benefit from cross-selling opportunities when the BOPS customers visit the stores to pick up their orders (Warner, 2013). Thus, many omnichannel aspirants consider BOPS as their ‘top strategic priority’ (Forrester, 2014). Target, Kohl's, Staples, Macy's, Best Buy, Walmart, Lowe's, and The Home Depot are some of the top retailers who have started offering BOPS to the customers (Denman, 2019). However, to be able to provide in-store pick up facility for online orders, a retailer needs to resolve a number of operational challenges.

Inventory management has been identified as one of the most critical challenges in omnichannel distribution (Arslan et al., 2020), and more so in BOPS service provisioning context (Meyersohn, 2019). The physical store, which might so far have been serving only walk-in customers, needs to adjust its inventory control policy so as to optimally cater to both types of demands – walk-in and BOPS. Walmart, Target, and Best Buy are some of the retailers who have found it difficult to maintain a store-inventory level ‘consistent’ with both walk-in and BOPS demands (Bose, 2014). Traditionally, physical stores have been operating with limited sales floor and inventory storage space due to high lease/rent expenses (Balu and Cavale, 2019; Hippold, 2019). With introduction of BOPS service, the stores continue to operate with existing space constraints, but now have to serve BOPS orders in addition to the regular walk-in ones (Madhusoodanan, 2016). For every walk-in customer served, inventory depletion is immediate. In comparison, an item reserved for a BOPS order continues to be kept in the inventory until it is picked up by the concerned customer. However, customers differ in the time they take to visit the store to pick the ordered items. The retailers also do not want to hold an item indefinitely for a customer (Polumbo, 2019). Different retailers follow different pick up windows, generally within 3–30 days, beyond which an order is cancelled, the refund procedure initiated, and the reserved item shifted back to the unreserved section of the inventory. For example, Target allows a maximum holding period of 3 days,² whereas The Home Depot holds an order for a maximum duration of 30 days.³ Some of the retailers even allow additional holding period upon special request.⁴ This wide variation in holding periods gives an indication that not all orders are picked up within the same day of order placement, but pick ups take place over a much longer period of time. Thus, an accepted BOPS order blocks one unit of inventory until it is picked up, incurring additional inventory holding cost for the store. Delayed pick ups delay inventory depletion thereby delaying replenishment requests with consequent pressure on availability of inventory for meeting subsequent walk-in or BOPS demands. Thus, provisioning of BOPS service has implications on the store's inventory policy. Overstocking leads to increased inventory cost. In his interaction with Reuters, Hubert Joly (former CEO, Best Buy) acknowledged this challenge - “Stores that boost inventory to meet just the in-store pick up demand face a risk of being stuck with excess” (Bose, 2014). On the other hand, under-stocking not only leads to lost sales, but stock-outs have the potential to adversely affect customer experiences (Bendoly et al., 2005; Corsten and Gruen, 2004). Our objective is to find the optimal inventory control policy for a physical store in presence of BOPS orders.

Inventory control policy of the store is also contingent on the pattern of ownership of the online channel and the physical store. When the ownership of both these channels lies with the same entity, there may not be any revenue-sharing between the channels, and walk-in and BOPS orders can be served with equal priority. However, separate ownerships of online channel and physical store complicate the situation. Omnichannel ecosystem with franchise arrangements is nowadays quite common. Macy's, a US-based departmental store chain, and The Home Depot, another US-based home improvement supplies retailing company, offer BOPS service through a company-owned online channel and a network of franchisee stores (Denman, 2019). Pepperfry, an online furniture store, and FirstCry, an online shopping store for kid and baby products, are two India-based retailers who offer BOPS service through online channel and a network of a few company-owned and a number of franchisee stores. During the early days, BOPS revenue was usually credited to the online channel. This led to the in-store sales executives assigning lower priority to the pick up orders and, thus, adversely affecting the purchase experience of the concerned customers (Hippold, 2019). Thus, when the physical store and the online channel are owned by separate entities, there has to be a revenue-sharing agreement between the channels for every BOPS order served. Since the physical store gets the entire revenue for every walk-in customer served, and only a fraction of it for every BOPS order served, the store may find it financially beneficial to opt for an inventory policy that favours a walk-in customer over a BOPS request. The degree of such prioritization would depend on the BOPS revenue-sharing policy, i.e., what fraction of the BOPS revenue is shared with the store, and also on the BOPS and walk-in demand rates.

In this paper, we study various possible inventory control policies for a physical store participating in BOPS service. We consider both single and separate ownerships of online and physical channels. In a separate ownership context, walk-in demands can be favored by imposing certain restrictions on servicing BOPS orders. We consider two such restrictive policies. The first one rejects a BOPS order unless the store has more than a threshold level of unreserved inventory. The second one rejects a BOPS order if the inventory reserved for BOPS pick up reaches a pre-decided limit. For each policy, we find out the optimal base-stock level that would optimize the store performance. For the policies that restrict BOPS orders, we also find the optimal threshold of unreserved and reserved inventories for respective policies. As a measure of performance, we consider an operational cost structure with two components – inventory holding cost and lost sales cost. We also investigate how performances of different policies change with changes in the input parameters – walk-in and BOPS order arrival rates, inventory replenishment rate, BOPS order pick up rate, and fraction of BOPS revenue shared with the store. Performance comparison of these policies identifies situations where one policy dominates the others. There are also situations where differences amongst policy performances are barely discernible. We expect the findings to help a physical store determine the best course of action when serving both walk-in and BOPS customers.