Pricing and service decision of dual-channel operations in an O2O closed-loop supply chain
| Pages | 1567-1588 |
| DOI | https://doi.org/10.1108/IMDS-12-2016-0544 |
| Published date | 11 September 2017 |
| Date | 11 September 2017 |
| Author | Lingcheng Kong,Zhiyang Liu,Yafei Pan,Jiaping Xie,Guang Yang |
| Subject Matter | Information & knowledge management,Information systems,Data management systems,Knowledge management,Knowledge sharing,Management science & operations,Supply chain management,Supply chain information systems,Logistics,Quality management/systems |
Pricing and service decision of
dual-channel operations in an
O2O closed-loop supply chain
Lingcheng Kong
Business School, East China University of Science and Technology,
Shanghai, China, and
Zhiyang Liu, Yafei Pan, Jiaping Xie and Guang Yang
School of International Business Administration,
Shanghai University of Finance and Economics, Shanghai, China
Abstract
Purpose –The onlinedirect selling modehas been widely accepted byenterprises in the O2O era.However, the
dual-channel(online/offline, forward/backward) operations of theclosed-loop supply chain (CLSC) changedthe
relationshipbetween manufacturersand retailers, thusresulting in channel conflict.The purpose of thispaper is
to take a dual-channeloperations of CLSC as the research target, wherea manufacturer sellsa single product
througha direct e-channel as well as a conventionalretail channel; the retailerare responsible for collectingused
products in the reversesupply chain and the manufacturer areresponsible for remanufacturing.
Design/methodology/approach –The authors build a benchmark model of dual-channel price and service
competition and take the return rate, which is considered to be related to the service level of the retailer,
as the function of the service level to extend the model in the reverse SC. The authors then analyze the optimal
pricing and service decision under centralization and decentralization, respectively. Finally, with the
revenue-sharing factor, wholesale price and recycling price transfer payment coefficient as contract
parameters, the paper also designs a revenue-sharing contract led by the manufacturer and explores in what
situation the contract could realize the Pareto optimization of all players.
Findings –In the baseline model, the results show that optimal price and service level correlate positively in
centralization; however, the relation relies on consumers’price sensitivity in decentralization. In the extension
model, the relationship between price and service level also relies on the relative value of increased service
cost and remanufacturing saved cost. When the return rate correlates with the service level, a recycling
transfer payment can elevate the service level and thus raise the return rate. Through analyzing the
parameters in revenue-sharing contract, a point can be reached where lowering the wholesale price and
raising the transfer payment coefficient will promote retailers to share revenue.
Practical implications –Many enterprises establish the dual-channel distribution system both online and
offline,which need to understand how to resolvetheir channel conflict. The conflictis especially strong in CLSC
with remanufacturing. The resulthelps the node enterprises realizethe coordination of the dual-channel CLSC.
Originality/value –It takes into account the fact that there are two complementary relationships, such as
online selling and offline delivery; used product recycling and remanufacturing. The authors optimize the
strategy of product pricing and service level in order to solve channel conflict and double marginalization
in the closed-loop dual-channel distribution network.
Keywords E-commerce, Closed-loop supply chain, Dual-channel, Pricing strategy, Revenue-sharingcontract
Paper type Research paper
Highlights:
(1) The optimal price and service level correlate positively.
(2) The recycling return rate of the used product correlates with the service level.
(3) Solve channel conflict and double marginalization in a closed-loop dual-channel
distribution network. Industrial Management & Data
Systems
Vol. 117 No. 8, 2017
pp. 1567-1588
© Emerald PublishingLimited
0263-5577
DOI 10.1108/IMDS-12-2016-0544
Received 19 December 2016
Revised 22 February 2017
Accepted 2 March 2017
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/0263-5577.htm
The work was supported by National Social Science Fund of China (Grant No. 15ZDB161) and National
Natural Science Foundation of China (Grant No. 71272015 and 71402053).
1567
Dual-channel
operations in
an O2O CLSC
1. Introduction
In the era of the new trading mode of e-commerce, many enterprises are opening up an
online direct selling market and establishing a dual-channel distribution system of both
online and offline, while retaining conventional retail outlets. The channel service provider
and online platform service provider also become members of the traditional supply chain.
With the e-commerce mode, the manufacturer not only saves on costs devoted to the
channel, but is also able to acquire the latest demand data through an information-sharing
platform and to adjust the price of the product to affect the purchasing decisions of
customers. Different from the conventional distribution system of a physical shop,
manufacturers in a dual-channel distribution system are not only the upstream suppliers,
but also the competitors for retailers.
In the earlier practice of the e-commerce mode, the price provided by the manufacturer
for online shopping was usually less than that provided by offline retailers. Such a pricing
decision stimulated customers to change their purchasing habits, but led to fierce channel
conflict between online and offline. For example, the online platform Niketown, established
by Nike in Chicago, was considered a threat to Nike’s brand retailers. The famous apparel
manufacturer Levi failed to coordinate the relationship with other brand retailers after its
online direct selling channel was introduced and was forced to close its online selling
platform. From then on, manufacturers such as IKEA and Apple tried to establish another
type of e-commerce mode. They provide an ordering service online and a pick-up service
offline. For instance, before the new model of iPhone is released, customers are allowed to
order in advance on Apple’s website. They choose the style and color and make payment
online in advance. Then on the release day they can pick up their iPhone directly in the
physical shop. This complementary channel mode coordinates online and offline channels
and provides the manufacturer with a more accurate demand prediction.
Group buying sites like Groupon are O2O services; they provide online discounts for
real-world shopping experiences like restaurants and movie theaters. Consumers can book
their order for food online and then enjoy their food in offline restaurants which can save their
waiting time. For automobile O2O, consumers can book a car online at a relatively low price,
and then they can go to the offline auto brand 4S stores to take their car and enjoy the
after-sales services there. In this scenario, consumers can know well about the car they want to
buy through browsing car O2O websites. After paying for the deposit, consumers can take a
testdrive,andfinallytheypayfortheresidualbalanceandthenownthecar.Withtherapid
development of information technology, there is increasing number of consumers who want to
seek and book products online first and then consume them in offline brick-and-mortar stores
later. This trend can be exemplified by the above-mentioned online stores such as Groupon,
Yelp andDianping in the cateringindustry and Zipcarand Uber in the transportationindustry.
Meanwhile, the delivery service offline allows customers to get the product fast and
conveniently and raises the level of customer satisfaction (Chen, 2008). On the one hand,
manufacturers can control the scale of retail channels through opening up online channels,
thus constrainingthe bargaining power of retailers.On the other hand, the conventional retail
channels are still irreplaceable for manufacturers. Offline stores promote the brand effect by
providing after-sales service,cultivating potential customersand maintaining products.It has
been proven that manufacturers will suffer from a serious loss of both market share and
revenue if they hastilyreplace conventional retail channelswith e-commerce without offering
an efficient offlineexperience and service, while retaining a dual-channel distribution system
allows them to keep or even expand market share and obtain more profit.
1.1 Related literature
The flourishing development of e-commerce draws the attention of the academic
community to the dual-channel supply chain. The focus is mainly on channel selection and
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