Incentives to reliable order fulfillment for an Internet drop-shipping supply chain

In this paper, we analyze the interaction between revenue sharing and quality of order fulfillment that occurs in an Internet drop-shipping distribution system comprising an e-tailer and a supplier. The e-tailer manages sales activities and sends customer orders to the supplier, while the supplier fulfills the order. With drop-shipping strategy, the e-tailer cannot monitor or control the supplier's shipping operations and takes the risk of loss due to the supplier's inefficient deliveries. Using a Stackelberg game, we explore how the e-tailer (leader) can give the supplier (follower) appropriate incentive to improve the level of delivery reliability. We also address whether and when the supplier is willing to share its private cost information with the e-tailer. Since the e-tailer is always better off by knowing the supplier's private information, we study three possible strategies for the e-tailer to extract more accurate cost information from the supplier. Among them, we find that strategic partnership and utilization of information leakage are feasible strategies while a side payment is not.