Development of Solution Methodologies for Online Order Fulfillment in Omnichannel Retailing

Abstract

Over the last few decades, retailing has gone through paramount of transformations and is moving towards omnichannel retailing for integrating store-based and online retailing.However, store-based retailers have apprehensions about omnichannel retailing because of high fulfillment cost and low profitability for online orders.This paper addresses a new problem of online order fulfillment in omnichannel environment considering fulfillment options such as from store, fulfillment center, direct-to-customer center and vendor.Particularly we address fulfillment, delivery, sourcing, inventory, shipping and fixed costs by proposing a mixed-integer profit maximization model, which is tested on small instances.For large scale randomly generated instances, we use Bender's decomposition to provide near optimal solution.The model assesses fulfillment decisions over multiple time periods to determine inventory needed to be shipped from vendor from different locations in retailer's system.These product flow decisions in turn affect how much online demand that can be fulfilled profitably.In addition to the prime objective of profit maximization, the proposed model incorporates a lost-sale penalty towards balancing two conflicting requirements of profit maximization and lost sale minimization and to ensure long term customer relationship.Finally, managerial insights are developed by evaluating operational and logistics cost and profitability for different fulfillment options.