Inventory and distribution strategies for retail/e-tail organizations

In the retail sector many traditional bricks-and-mortar companies have added online sales channels to their supply chains. Unfortunately, even though the combined retailer/e-tailer is becoming a common business model, there is very limited research addressing retail/e-tail operations. To address this gap, this research considers where and how much inventory should be allocated and held at each site for a company that satisfies both in-store and online demand. Specifically, we determine how many and which of a firm’s capacitated locations should handle online sales to minimize total cost (holding, backorder, fixed operating, transportation, and handling costs). Our primary findings include the following: (i) when all costs are considered the percentage of sales occurring online plays a critical role in determining the number of sites providing e-fulfillment; (ii) when holding and backorder costs are the only consideration (i.e., the customer pays for shipping), the standard deviation of in-store demand controls where online inventory should be located, regardless of the percentage of demand occurring online; and (iii) an increase in unit shipping costs does not necessarily imply that adding online fulfillment locations will decrease total cost. Results from a computational study illustrate that the model provides good solutions even when demand is correlated or not normally distributed.