The value of postponing online fulfillment decisions in multi-channel retail/e-tail organizations
Computers and Operations Research
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In the retail sector many traditional bricks-and-mortar companies have added online sales channels to their supply chains. Unfortunately, even though the combined retailer/e-tailer is becoming a common business model, there is very limited research addressing retail/e-tail operations.To fill this gap, this dissertation considers the design of distribution systems for companies that satisfy both in-store and online demand. First, an online fulfillment assignment model is developed to determine how many and which of a retailer/e-tailer's locations should handle online sales to minimize total cost (holding, backorder, fixed operating, transportation, and handling costs). The nonlinear integer optimization problem is initially formulated under stationary in-store and online demands for a single class of products. Computational results indicate that when all costs are considered the percentage of sales occurring online plays a critical role in determining the number of sites providing e-fulfillment. However, when holding and backorder costs are the only consideration the standard deviation of in-store demand controls where online inventory should be located, regardless of the percentage of demand occurring online. Next, results from the single period, single product case are used to analyze more complex retail/e-tail environments. First, a branch-and-bound solution methodology is developed to determine how many and which locations should handle online sales in single period, multi-product environments. Then, dynamic programming is used to extend and solve the online fulfillment assignment problem in multi-period, single product environments with penalties for adding and/or removing e-fulfillment capabilities. An integrative model is then developed to identify e-fulfillment locations and assignments for the general multi-period, multi-product problem. Finally, the value of retail/e-tail investment in the continuous monitoring of online demands and inventory positions is examined. Two dynamic assignment policies that incorporate this real time information are developed to specify which inventory holding location will handle each online sale. Computational results indicate that investing in dynamic assignment capability can reduce system cost (holding, backorder, transportation, and handling) by as much as 8.2% over the optimal static policy. Both the percentage of sales occurring online and the set of sites performing e-fulfillment played critical roles in determining the magnitude of the benefit.