Optimizing Omni-Channel Fulfillment with Store Transfers

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Optimizing Omni-Channel Fulfillment with Store Transfers

Paul, Joydeep / Agatz, Niels / Savelsbergh, Martin

Highlights • We introduce a capacity sharing strategy in omni-channel retail distribution. • Stores are used as transfer points to move demand from one channel to another. • We develop an effective approach to operationalize the sharing strategy. • Our computational study shows substantial savings due to capacity sharing.

Abstract The presence of different distribution channels in omni-channel retail makes the fulfillment process challenging. When consumers can buy online and pick up their purchased goods at a store, the stores are often visited by a vehicle that supplies the pick-up points (PUPs) and by a vehicle that replenishes the store’s inventory. We study the benefit of exploiting any spare capacity in the vehicles replenishing store inventories to reduce online order fulfillment cost by transferring online orders to these vehicles at one or more of the stores visited. This involves choosing transfer locations and the set of stores whose online orders are transferred at these locations so as to minimize the online order fulfillment cost. We present a mixed integer linear programming model as well as an effective and efficient heuristic for solving this problem. An extensive computational study shows that significant benefits can be achieved by sharing capacity across the two channels.