Omni-channel inventory management of perishable products under transshipment and substitution

We consider a retailer selling two substitutable products through an offline and online channel. The products are stored at separate inventory locations and transshipments from the offline channel to online customers are possible, i.e. we propose a two-location inventory model incorporating customer-driven inventory interactions (demand substitution initiated by the customer) and retailer-driven inventory interactions (transshipment, i.e. demand substitution initiated by the retailer). We compare this model to a system incorporating customer-driven substitution only and use empirical data about customers’ preferences and perceptions of grocery shopping in online and offline channels to understand the trade-offs between various substitution forms in omni-channel retailing. In a numerical study, we discuss the optimal order quantities and resulting expected profits and quantify the value of a retailer-driven transshipment strategy. Although the empirical results reveal that online demands are relatively low and product substitution rates are particularly high, our results confirm that a transshipment system can achieve higher expected profits than when considering customer substitution only. Finally, we discuss the performance of policies that ignore product and/or channel substitution. We find that having complete information about product substitution is crucial for a grocery retailer's omni-channel order quantity decision.