Making Better Fulfillment Decisions on the Fly in an Online Retail Environment

Abstract

Relative to brick-and-mortar retailers, online retailers have the potential to offer more options to their customers, with respect to both inventory as well as delivery times. To do this entails the management of a distribution network with more decision options than a traditional retailer. The online retailer, not the customer, decides from where items will ship, by what shipping method, and how or whether multiple-item orders will be broken up into multiple shipments. What is the best way to fulfill each customer’s order to minimize average outbound shipping cost? We partner with an online retailer to examine this question. We develop a heuristic that makes fulfillment decisions by minimizing the immediate outbound shipping cost plus an estimate of future expected outbound shipping costs. These estimates are derived from the dual values of a transportation linear program (LP). In our experiments on industry data, we capture 36% of the opportunity gap assuming clairvoyance, leading to reductions in outbound shipping costs on the order of 1%. These cost savings are achieved without any deterioration in customer service levels or any increase in holding costs. The transportation LP also serves as the basis for a metric that provides information on the quality of the inventory position. Based on initial successful piloting, our industrial partner has implemented the metric as well as a version of the heuristic that it is applying to every fulfillment decision for each of its stock keeping units in North America.