Profitability of online order fulfillment in multi-channel retailing

Store-based retailers have been concerned about the high fulfillment costs and low gross margins of their online sales. This paper incorporates such issues in a non-linear mixed-integer profit maximization model of the online order fulfillment process for multi-channel retailers. A solution approach based on an iterative outer-approximation technique is developed. Using empirical data from a large U.S. retailer, the profitability of different options used by multi-channel retailers to fill online orders is evaluated. Managerial insights are developed through a factorial research design that highlights the effect of relevant logistics processes and fulfillment methods on the profitability of online sales for retailers.