Online or Offline: Channel Priority for a Dual‐Channel Supply Chain Under Demand and Yield Uncertainties

ABSTRACT Demand uncertainty and supply shortages have frequently been observed in various industries. This phenomenon poses a significant challenge to most manufacturers, particularly those that sell their products through both retail and direct online channels. To proactively address potential supply shortages, channel (fulfillment) priority —bestowing one particular channel with fulfillment priority—plays a pivotal strategic role. This paper develops dual‐channel supply chain models to investigate the manufacturer's channel‐priority strategy under conditions of demand and yield uncertainties. When only demand is uncertain, the following findings are demonstrated: (1) when the variance of demand and the yield level are moderate, it is advisable for the manufacturer to endow supply priority to the retailer; (2) when the market share of the online channel is not excessively high, prioritizing the retail channel can serve as a mutually beneficial strategy for both the manufacturer and the retailer; (3) if channel priority can be determined after demand realization, then the manufacturer will consistently prioritize the online channel for supply allocation; (4) the endogenization of yield or retail prices may alter the optimal channel priority strategy. Furthermore, when both demand and yield are uncertain, granting priority to the direct channel becomes a win‐win strategy if the variance of yield is sufficiently high.