Inventory Risk Management in Cross-Border E-commerce

With many of us working from home over the last year, we’ve become increasingly accustomed (and perhaps even excited) to seeing the UPS, Fed Ex, or Amazon truck roll up our driveways.

While it remains to be seen whether Covid-19 will affect online shopping in the long run, it is clear that it was already on the rise before the pandemic struck. According to the Centre for Retail Research, American online sales grew from about $350 billion in 2015 to $530 billion in 2018.

That’s great news for online retailers, but the industry comes with its own challenges, especially for companies that engage in cross-border e-commerce.

“Retailers fulfilling cross-border orders often face inventory problems in their overseas warehouses,” says Layth C. Alwan, Professor of Supply Chain, Operations Management & Business Statistics. “It gets very complex very quickly when they have extensive product offerings and have to manage not only demand risks, but also the tax risks associated with cross-border trade.”

To determine how these risks can be mitigated, Alwan – an expert in forecasting techniques and statistical modeling and process control – along with Ye Shi and Ting Wang from the School of Management at the University of Science and Technology of China, studied a major Chinese fashion retailer that sells to overseas consumers through online platforms.

Their study was recently published in Decision Sciences.

China is one of the leading cross-border e-commerce nations, with sales expected to reach $144 billion this year, according to chinainternetwatch.com.

The retailer they studied operates on a huge scale, with 1.3 million overseas orders each year from 150 countries. Its product line includes thousands of women’s dresses, with each item having a different stock keeping unit (SKU) for each color and size.

To fulfill such a large number of overseas orders, the company established a global warehousing system comprised of a domestic warehouse and more than 20 overseas warehouses. While managing the inventory levels in the domestic warehouse is relatively straightforward, management of inventory levels at the overseas locations is more complicated because of dynamic changes in demand and long lead times to replenish inventory for various selling seasons. Add to that the tax risks of doing business across borders.

Because traditional model-driven approaches failed to provide effective solutions to the company’s overseas inventory issues, the researchers developed a new data-driven approach to inventory management. Their approach integrates predictive analytics that produce reliable forecasts with prescriptive analytics that can optimize inventory decisions and accommodate the cross-border risks.

“This was a real-life scenario in which the demand fluctuated significantly and the tax risks were highly uncertain,” says Alwan. “Subtle changes to either of those variables have a tremendous impact on corporate decision-making.”

A simulation they conducted found that pre-classifying items alone can result in significant cost savings for cross-border e-commerce retailers – up to 20%.

As e-commerce continues to grow for the foreseeable future, these are important findings for online retailers, especially those with multi-item overseas inventories.

The study was published in Decision Sciences, “Analytics for Cross-Border E-Commerce: Inventory Risk Management of an Online Fashion Retailer,” by Ye Shi, Ting Wang, and Layth C. Alwan, 2020.