Joint inventory and fulfillment decisions for omnichannel retail networks

TLDR

An omnichannel retailer with physical stores and online fulfillment centers must decide inventory levels at each location and fulfillment origins for online orders, as online demand can be met from any site with stock. The study develops a fast, scalable inventory heuristic for multilocation omnichannel retail based on two‑store analysis. They model seasonal inventory decisions at horizon start and repeated online fulfillment, relaxing the joint problem with a hindsight‑optimal bound that decouples inventory from fulfillment while enabling virtual pooling of online demand, and use this to create a heuristic that guides dynamic fulfillment. Using a numerical study on a fictitious U.S.

Abstract

Abstract An omnichannel retailer with a network of physical stores and online fulfillment centers facing two demands (online and in‐store) has to make important, interlinked decisions—how much inventory to keep at each location and where to fulfill each online order from, as online demand can be fulfilled from any location with available inventory. We consider inventory decisions at the start of the selling horizon for a seasonal product, with online fulfillment decisions made multiple times over the horizon. To address the intractability in considering inventory and fulfillment decisions together, we relax the problem using a hindsight‐optimal bound, for which the inventory decision can be made independent of the optimal fulfillment decisions, while still incorporating virtual pooling of online demands across locations. We develop a computationally fast and scalable inventory heuristic for the multilocation problem based on the two‐store analysis. The inventory heuristic directly informs dynamic fulfillment decisions that guide online demand fulfillment from stores. Using a numerical study based on a fictitious network embedded in the United States, we show that our heuristic significantly outperforms traditional strategies. The value of centralized inventory planning is highest when there is a moderate mix of online and in‐store demands leading to synergies between pooling within and across locations, and this value increases with the size of the network. The inventory‐aware fulfillment heuristic considerably outperforms myopic policies seen in practice, and is found to be near‐optimal under a wide range of problem parameters.