The value of postponing online fulfillment decisions in multi-channel retail/e-tail organizations

Many retail/e-tail organizations assign responsibilities for online sales immediately and to the closest fulfillment location that has available stock. Unfortunately there is little research on the value of using such policies in retail/e-tail companies. To fill this gap, this paper examines two aspects of the online fulfillment assignment decision that differ from current practice. We propose that online sales should be accumulated before they are assigned to a fulfillment site and that more inventory position information should be leveraged into the fulfillment decision. Specifically, we develop and evaluate a “quasi-dynamic” allocation policy that assigns accumulated online sales to fulfillment locations based on expected inventory, shipping, and customer wait costs. Computational results show that our policy can reduce costs (i.e., holding, backorder, transportation cost) at the fulfillment locations by as much as 23% on average over a commonly used transportation cost policy. In addition, postponing the allocation decision and allowing sales to accumulate can reduce inventory costs at the fulfillment sites by 14% over common practice of instantaneously assigning online sales responsibilities. The magnitude of the benefit depends critically on the number of allocations made each period and the fraction of total sales coming from the online channel. Although postponement delays receipt of online sales, our findings suggest that explicitly incorporating customer service in the allocation decision can improve product availability at little or no additional cost.