The effects of demand referral on the inventory levels in multi-channel distribution systems

In a setting a supplier selling directly to the end customers by her wholly-owned Internet online channel, as well as a traditional physical retail channel, the supplier may refer her customers to the retailer (demand referral) when out of stock where the supplier stocks only for the online customers. The retailer pays for the excess demand of the supplier and the excess customers have a substitution rate to the retailer. We explore the impact of the demand referral (DR) on the multi-channel distribution systems. The results show that when the price of DR is predetermined by negotiation the use of DR increases the base-stock level of the retailer but decreases the base-stock level of supplier in competitive setting. Therefore, DR improves the efficiency of the global supply chain compared with understock of the retailer in traditional supply chain. Finally, numerical experiment is used to illustrate the results of this paper.