As we have posted about before, retailers using store inventory to fulfill on-line orders is a thing. It is also a thing that raises an interesting question: At what level of store inventory should a retailer stop using store inventory to fulfill on-line orders? That is, should everything be available first-come, first served or should some store inventory be held back only for those customer that wander into the store? According to the Chicago Tribune, different chains are following different strategies on this (With Hatchimals scarce, who gets dibs — online shoppers, or those in the store?, Dec 13).
Target ships online orders from 1,000 of its stores, up from 460 last year. To avoid empty shelves, Target will turn off the order pickup or ship-from-store option on some items when a store’s stockpile falls below a certain threshold, said Target spokesman Eddie Baeb. Stores that ship also get extra inventory.
An online customer likely doesn’t care which store or warehouse handles their purchase. The shopper already walking the aisles does. Exactly how many items Target holds back depends on the product and how quickly it typically sells. …
Other retailers, like Toys R Us, don’t try to guess how many items to hold back for in-store customers.
Even on Christmas Eve, the retailer doesn’t bump back online orders to help procrastinating brick-and-mortar holiday shoppers. Purchases, whatever the format, are first-come, first-served, said Toys R Us spokeswoman Jessica Offerjost.
There are pros and cons to both of these approaches. Target is not only providing better service for its in-store shoppers, it is, as the article notes, also adding a safety factor for its web sales. Promising a customer that they can pick up an item at a store or assigning a specific store to send a package is all great if the item is available. If it ain’t, we have a recipe for frustration. What the systems says is available and what actually is available can differ for many reasons. Perhaps an in-store customer grab the last unit in between the time a web order is placed and a store employee went to grab it. Alternatively, inventory records could be off because an item was stolen or damaged or maybe an item was just misplaced.
One can think of Target’s approach as akin to a newsvendor problem. They may find themselves turning down a web sale for a possible sale in the store. Does this make economic sense? It does if fulfilling from stores is pricey or if they assign a high penalty cost to missing an in-store sale. (Note that this also suggests that they do not put a huge penalty cost on disappointing a web shopper.)
If we take this approach to the problem, does Toys R Us strategy make sense? Now we would need to suppose that fulfilling from the store is not too expensive and that in-store penalty costs are not outrageous. It may well be that different retailers perceive these costs very differently.
There is a final twist here that may be relevant: How does on-line availability affect in-store traffic? A click-and-collect model provides shoppers a glimpse of store inventory before they leave home. If customer are told that an item is not available for pick up at a store this evening, why would they come in looking for it? That is, if customers check inventory before heading out, putting the kibosh on in-store pick up when there is still inventory may lower store traffic.
This isn’t just a theoretical concern. My colleague Toni Moreno has a paper looking at these issues. He and his coauthor empirically study the impact of implementing a pick up in store option at one retailer. They find that the click-and-collect model resulted in a decline in on-line sales but an increase in store traffic and in-store sales.