Challenges of Order Fulfilment for an Omnichannel Retailer

Project: Research

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Description

To stay competitive, many retailers operate online and physical retail channels to attract customers with different shopping preferences. When retailers take an omnichannel approach and integrate their online and physical channels, they face new opportunities and challenges. This proposal focuses on the opportunities and challenges in omnichannel order fulfilment.Apart from in-store customers, an omnichannel retailer serves customers who order products online or use both retail channels to complete their order. The first challenge faced by an omnichannel retailer is deciding how to fulfil the online orders. When a retailer receives an online order, he incurs significant shipping cost to bring the products from his warehouse to the customer’s home. However, an omnichannel retailer may operate a physical store near the customer’s home, and he can choose to ship the order from the local store to reduce shipping cost. Choosing to ship from the physical store comes with the opportunity cost of using inventory meant for potential in-store customers. Furthermore, a physical store is not designed for preparing online orders, and the picking cost in the physical store can be much higher than in the warehouse.In addition, an omnichannel retailer may offer the option to ``buy online, pick-up instore’’ (BOPS), where customers can reserve selected products online and pick up their order in the physical store after a few hours. BOPS allow customers to receive their orders quickly and avoid out-of-stock situations upon a store visit. The second challenge faced by an omnichannel retailer is deciding which products to offer under BOPS. From the retailer’s perspective, BOPS avoids shipping cost, but it faces the same picking cost as online orders. Furthermore, customers are unlikely to order under BOPS if they cannot reserve everything on their shopping list due to the hassle of travelling to the store. These orders consume in-store inventory, and can be unprofitable if the associated picking cost exceeds the order’s profit margin.This proposal studies the optimal fulfilment problem for an omnichannel retailer who strategically uses the in-store inventory to reduce the shipping cost of online orders and to satisfy customers who complete their purchases via BOPS. I model the problem as a dynamic program, but computing the optimal policy is hampered by the curse of dimensionality. Hence, I will use approximate dynamic programming to construct policies with provable performance guarantees, and use these policies to extract managerial insights for improving omnichannel order fulfilment.

Detail(s)

Project number9043443
Grant typeGRF
StatusNot started
Effective start/end date1/01/23 → …