Making Better Fulfillment Decisions on the Fly in an Online Retail Environment

Relative to brick-and-mortar retailers, online retailers have the potential to offer more options to their customers, with respect to both inventory as well as service times. To do this entails the management of a distribution network with more decision options than a traditional retailer. The online retailer, not the customer, decides from where items will ship, by what shipping method, and how or whether multipleitem orders will be broken up into multiple shipments. Furthermore, online retailers often carry many low-volume items, and do not stock each item at every warehouse location. One question facing online retailers is this: what is the best way to fulfill each customer’s order to minimize average outbound shipping cost? We partner with an online retailer to examine this question. We develop a heuristic that makes fulfillment decisions by minimizing the immediate outbound shipping cost plus an estimate of future expected outbound shipping costs. These estimates are derived from the dual values of a transportation problem. In our experiments on industry data, we capture 36% of the opportunity gap assuming clairvoyance, leading to reductions in outbound shipping costs on the order of 1%. We also characterize the attributes of SKU’s most conducive to benefitting from the heuristic.