Investment timing for a dual channel supply chain

A crucial question in a supply chain is whether to construct an internet channel in addition to a traditional retail channel. Despite many studies on this issue, little attention has been paid to optimal investment timing for developing the internet channel. To address this gap in the literature, this paper proposes a model to help a firm determine the timing by considering a firm's option value of waiting. Our model also incorporates customer's preference between the retail and the internet channel to derive total profits of the vertically integrated channels. Based on the proposed model, we study the impacts of cost uncertainty, sunk cost, cost efficiency and customer's behaviour on an investment timing strategy. In addition, the comparison study of a strategy by our proposed model and that by the widely used net present value method implies that the traditional method underestimates an investment of a dual channel and leads to suboptimal decisions of a firm. [Received: 30 March 2010; Revised: 24 January 2011; Revised: 21 July 2011; Accepted: 5 August 2011]