We present a two-echelon dual-channel inventory model in which stocks are kept in both the manufacturer warehouse (upper echelon) and the retail store (lower echelon), and the product is available in two supply channels: the traditional retail store and the web-based direct channel. The system receives stochastic demand from two customer segments: those who prefer the traditional retail store and those who prefer the web-based direct channel. Any order placed through the direct channel is fulfilled through direct delivery from the manufacturer warehouse. When a stockout occurs in either channel, customers are willing to shift the channel with a known probability. Customers who are unwilling to shift the channel result in lost sales. In order to develop operational measures of supply chain flexibility, we define a cost structure which captures two different operational cost factors: inventory holding costs and lost sales costs. Several insights are evident from the numerical experiments. We also examine the performance of two other possible channel strategies: retail-only and direct-only strategies. Simulation outcomes indicate that the dual-channel strategy outperforms the other two channel strategies in most cases, and the cost reductions realized by the flexibility of the dual-channel system could be very significant.
Chiang, Wei-Yu and Monahan, George E., "Inventory Management with the Internet-Based Direct Channel in a Two-Echelon Supply Chain System" (2002). ICEB 2002 Proceedings. 103.