An Omnichannel Distribution Model to Better Serve Online Customers

Abstract

With the rising adoption of e-commerce and online shopping, many retailers are facing the challenge of transitioning across channels to offer a seamless customer experience. One way of addressing this challenge consists of leveraging omnichannel retailing. Our sponsor company, a large US grocery retailer, is striving toward providing an omnichannel customer experience in the US retail grocery market. To help our sponsor to achieve this objective, we analyzed how to best integrate the company’s offline and online distribution channels for one of its brands in Massachusetts. We leveraged the insights from the analysis to build a mixed integer linear program that optimizes the company’s operational costs while meeting the customer demand and complying with the facilities’ capacity constraints. We also conducted multiple scenario analyses, such as an unexpected increase in the online demand due to unforeseen situations like the COVID-19 crisis, in order to assess the flexibility and robustness of our proposed model. Our omnichannel model enables the sponsor company to achieve substantial cost savings, as the associated transportation, handling and facility opening costs are ~22% lower than those incurred by the current distribution network. Finally, the scenario analyses demonstrate that our omnichannel model is flexible and reliable, allowing our sponsor to absorb a 37% increase in the online customer demand in the most cost-effective manner (i.e., without having to incur additional costs on top of the current network’s costs).