Scope Contracts to Coordinate Assortment Planning in Omnichannel Retail Supply Chains

Problem definition: Omnichannel retail systems consist of online sales channels and physical stores. We consider a decentralized omnichannel retail supply chain (ORSC), where the online channel is the manufacturer’s sales platform and the physical store is an independent retailer selling the manufacturer’s products. The assortment showcased by the retailer in its store affects sales and potential product returns for both sales channels because customers can over- or undervalue the products that are available only online. This interaction causes inefficiencies for both parties if they rely on this decentralized business relationship. Methodology/results: Using a Stackelberg game, we characterize the optimal decisions on wholesale prices and assortment in the decentralized setting. Then, we characterize the optimal assortment in a centralized setting and show that it can be substantially different from that of the decentralized setting, which is evidence for inefficiency. To eliminate this inefficiency, we propose a scope contract designed by the manufacturer that offers wholesale price discounts on selected products that appear in the optimal assortment of the centralized setting. Managerial implications: The proposed contract is instrumental in coordinating the ORSC so that both parties are more profitable than in the decentralized setting. In some cases, coordination requires a generous contract that offers some products for free along with a lump-sum payment. The profit allocation between the parties can be adjusted through the discount rate specified in an equivalent single-parameter version of the contract. However, channel coordination may lead to reduced customer welfare. In such cases, we propose a welfare-constrained framework that preserves welfare while improving profitability.

Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2023.0539.