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Order Fulfillment and Logistics Considerations For Multichannel Retailers
Order Fulfillment and Logistics Considerations For Multichannel Retailers
Abstract This paper addresses the challenge of making multichannel decisions for
order fulllment and logistics. We present a framework for multichannel strategies
consisting of seven elements. Some channel decisions are part of the marketing
mix, with the ultimate choice left to the customer. Other channel decisions concern
logistics activities and can be made, for example, based on efciency measures. We
study the situation of a Dutch retailer that sells large household items (e.g. appli-
ances or furniture). Inventories of products are available at the stores as well as at
the central warehouse. Customers can select and order the products in the store; the
store then delivers the products to the customers homes, since the items are typ-
ically considered too big to be transported by the customers themselves. Recently, a
distribution network was added to deliver products from the central warehouse to
customers in response to online orders. The two distribution networks are operated
separately, as is common at many retailers. We model the companys logistics
operation by means of a variant on the Multi-Depot Vehicle Routing Problem to
make dynamic channel assignments on a per customer basis. Our study aims at
creating awareness of the wider portfolio of multichannel decisions, at stimulating
dynamic assignment of orders to available channels, and at providing case-based
evidence of the potential gains of such a strategy.
1 Introduction
Retail organizations increasingly consider the internet a cornerstone for their sales
strategy. According to the Thuiswinkel Markt Monitor (Homeshop Market
Monitor), the share of online sales in total sales of products in The Netherlands
accounted for 7.6 % in 2014, adding a full percent compared to the 6.6 % share in
2013 (Jongen 2015). Already before the advent of internet sales, retail operations
were considered to be among the most important, dynamic and difcult operations
to manage (Hill et al. 2002). Adding an internet sales channel only increases that
challenge for several reasons. As was noted in Roodbergen et al. (2012), the
consumer loyalty is decreasing while at the same time product and price awareness
of consumers is increasing, which results in higher fluctuations of demand. The
channel preferences (online or physical store) of consumers are continuously
changing depending on product type, weather conditions, price levels, and
numerous other reasons. Moreover, during the decision phase, consumers tend to
frequently switch channels, gathering information on the web, and then buying the
product in a store, or the reverse. Retailers are evidently aware of consumers
behavior and are rapidly adapting their sales strategies. Many brick-and-mortar
companies have introduced an online store or upgraded the existing. And online
players are opening physical retail outlets. All of this, however, only concerns the
front-end. The online and in-store operations are typically organized and run as
separate businesses. (Roodbergen et al. 2012, p. 13).
It is in this space we seek to make a contribution. Or as Maxwell and Hudson
(2011, p. 2) state One of the biggest overall conclusions is that consumers are
leading the way in multichannel shopping, with many retailers lagging behind in
terms of meeting their needs. Todays global retailers have a huge opportunity to
enhance the mechanisms necessary to keep up with shoppers who are demanding
more customization in terms of delivery and returns, product choice, and number of
channels from which to choose. To this end, we rst dene seven elements of
multichannel strategies, expanding on a framework from marketing research
(Neslin et al. 2006). Our framework adds elements specic to the logistics opera-
tions of retail and internet sales organizations, which can support the choices a
multichannel (online) retailer faces in this respect. In the second part of the chapter
we select one prominent logistics element from the framework and show how a
dynamic channel selection mechanism in the logistics process execution can be
exploited to enhance efciency of the order fulllment.
In literature, the term multichannel is used for a variety of activities. For example,
Frazier (1999) describes a multichannel strategy as a situation in which two or more
distinct channels for goods flows sell the same product line to the same target
Order Fulllment and Logistics Considerations 185
Search Purchase Forward Fulfillment Forward Logistics Return Logistics Return Fulfillment After sales
Website Website Pick from e-DC To consumers From consumers Return to e-DC Website
home by delivery home by delivery
company company
Store
Pick from central Return to store
warehouse inventory
Store Store
Call center
To store by To store by
delivery consumer, from
Pick from store
company, from store onwards by Return to central Social media
inventory (by
store to home by delivery warehouse
Call center Call center customer)
consumer company
(E)mail
Fig. 1 Overview of channels for seven elements of physical goods sales to consumers
186 K.J. Roodbergen and I.B. Kolman
Warehouse e-DC
Purchase online,
store store store store fulfillment in e-DC,
home delivery
Purchase in store,
fulfillment in store,
home delivery
consumers consumers
(branded) truck delivering the products. The origin of that truck is unknown and
irrelevant to the consumer. This indifference is not true in general, for example, if
consumers carry home their own products from the store. Also in other cases, it may
not be desirable to retrieve online orders from a stores inventory. For example,
several supermarkets started their online operations by picking online orders from
within the store, but switched to a dedicated e-DC when volumes reached the point
that store customers started complaining about the professional pickers in the store.
Since appliance and furniture stores typically have a storage room separated from
the showroom floor, this is not an issue here.
Cost savings from network integration can be achieved in the following manner.
When stores are provided with their usual store supply from the warehouse, the
available empty space in the truck is used to further increase store inventories for
expected or known online orders. Thus, this transport from the warehouse to the
store is virtually free of charge. Additional handling costs do arise. Cost advantages
are the result of the fact that when orders occur, some products are already closer to
the customer and need less transportation. Potentially additional inventory risks,
like obsolescence, may occur. It is therefore important to limit additional stock
keeping to products that are ordered frequently, are also sold in the store itself, and
will remain in the assortment for the immediate future. This chapter, however, does
not treat inventory decisions, but rather focuses on channel decisions. Desirability
of stock depletion can be incorporated relatively easily by means of virtual cost
incentives.
We present a hybrid genetic heuristic for solving this variant of the Multi-Depot
Vehicle Routing Problem (MDVRP). The MDVRP is an extension of the classical
Vehicle Routing Problem (VRP). The VRP involves determining a set of routes that
minimize total costs or travel distances, while satisfying certain constraints.
The MDVRP adds to this the option of sourcing from multiple locations, in our case
stores and the DC. A difference between the regular MDVRP and our problem is
that sources are unrelated in the regular MDVRP. The stores in our situation,
however, use stock supplied by the DC, while at the same time the DC can serve as
a source for deliveries. This gives additional handling costs at the stores that result
in a more complex cost structure and objective function.
The general scheme of our meta-heuristic for assigning consumers orders to the
best fulllment and logistics channels is presented in Fig. 3. The heuristic generates
an initial population of feasible and infeasible chromosomes, where each chro-
mosome represents a routing scheme corresponding to a randomly determined
assignment scheme. Next, the chromosomes undergo some route improvement
techniques during the education step. Thereafter, roulette wheel selection is applied
to select parents. The parents assignment schemes are randomly combined to
produce offspring, and corresponding routing schemes for this offspring are
determined. The offspring undergoes the education procedure and is included in the
subpopulations based on its (in)feasibility. Below, the various steps of the algorithm
will be explained. Our algorithm follows the lines of the algorithm of Vidal et al.
(2012) with modications as presented by Kolman (2012).
source i where i represents the DC (i = 1) and the stores otherwise (i = 2,, s). We
dene the sets of locations VD = {1,, s}, VC = {s + 1,, s + n} and V = VD [ VC .
The assignment of a customer location to a source can be dened by matrix Z
(r) = zij(r) where zij(r) = 1 if customer location j 2 VC is assigned to source i 2 VD,
and zero otherwise. Besides the source assignments, the chromosomes also contain
the information on the routes and vehicle assignments. We use a nearest neighbor
routing method with vehicle capacity constraints to generate routes for the initial
population. The matrix X(r) = xijk(r) represents the routing scheme of chromosome
r where xijk(r) = 1 if arc (i, j) is contained in route k 2 R(r) and zero otherwise, with
the set R(r) representing the routes of chromosome r.
Chromosomes may be infeasible since the maximum route duration T was not
yet taken into account. Let tij denote the time for traveling from location i to
location j, and let j denote the required unloading PtimePat customer j, then the
maximum route duration constraint is given by i2V j2V xijk r tij sj T:
Chromosomes are inserted in the feasible or infeasible subpopulation, based on this
constraint. At the end of the initialization step, at least one of the subpopulations
contains chromosomes.
Order Fulllment and Logistics Considerations 191
5.2 Evaluation
where c1 represents a cost per kilometer, including fuel, driver, insurance, and fleet
costs, and where dij represents the distance of driving from i to j.
Handling costs are counted at all intermediate points as
X X
ch r zij r qij c2 ;
i2VD nf1g j2VC
where the handling costs are represented by c2, a cost per unit of volume, and where
qj gives demand at customer location j 2 VC expressed in the same unit of volume.
Total cost are then given by ct(r) = ctr(r) + ch(r).
Penalty costs wr and the diversity contribution (r) of chromosome r, and the
evaluation function are calculated as in Vidal et al. (2012) and given by
1
EV r nc RANK ndc RANK Dr :
ct r wr
The function RANK(.) here presents the rank of chromosome r relative to the
other chromosomes, based on the criterion given between brackets. The best
chromosome is the one that maximizes the evaluation function. Ranks are weighted
by c and dc which are dynamically adjustable.
5.3 Education
consist of various ways for swapping vertices or partial routes. The nine moves are
randomly investigated, and the rst move yielding an improvement of the evalu-
ation value EV(r) is taken. This continues until none of the nine moves results in an
improvement. Then the feasibility of the chromosome is investigated and the new
evaluation value of the chromosome, EV(r) is obtained. When the feasibility of the
chromosome has changed, it also changes between subpopulations.
The rst step in creating offspring is the selection of parents. We apply the roulette
wheel selection operation (Goldberg 1989) which takes the evaluation criterion of
the chromosomes into account to select the best chromosome with the highest
probability and the worst with the lowest. Let the P probability of selecting chro-
mosome r as parent be dened by r EV r = q2Pop EVq.
To create offspring the assignment schemes of two parents, each selected by
means of the roulette wheel, are randomly combined. This random crossover results
in a new assignment scheme for a new chromosome. From this point onwards the
newly created offspring follows the same procedure as the chromosomes do in the
process of generating the initial population, i.e. routing of vehicles, feasibility
check, calculating the evaluation value, and education. Offspring is created as long
as the following two conditions are satised: (1) the two subpopulations have not
reached their maximum size + , and (2) the prespecied number of iterations
allowed in a row without improving over the best solution so far has not been
reached.
When condition (1) is no longer satised, only the best chromosomes are kept
of each subpopulation and the process re-enters the stage of generating offspring.
When condition (2) is no longer satised, only the /3 best chromosomes are kept
from both subpopulations and the process re-enters the stage of creating an initial
population to diversify the chromosomes.
The process evolves generation by generation until either one of the two stopping
criteria is met. The two stopping criteria are a maximum computation time, Tmax,
and a maximum number of iterations the algorithm is allowed to make without
improving over the best solution, ITallowed. When the computation time or the
number of iterations reaches its maximum value, the algorithm stops and the best
chromosome, i.e. the best found routing scheme is returned as the solution.
Order Fulllment and Logistics Considerations 193
6 Results
possible route, so all routing heuristics will provide the optimal solution. The
improvements we found are therefore largely due to the assignment of customers to
locations, which is directly linked to our prime research goal of channel assignment.
Next, we investigated efciency gains from choosing the best fulllment and
logistics channel on a per customer basis. The condence interval for the paired
differences between the genetic algorithm with dynamic channel assignment and the
genetic algorithm with only delivery from the DC is [18.3 %; 27.7 %]. This implies
an average improvement of 23.0 % when switching from pure centralized distri-
bution to a setup with partly centralized and partly localized fulllment and dis-
tribution for all online orders. Note that additional efforts for the extra handling at
the stores have been taken into account in these experiments.
7 Conclusions
The work presented in this paper provides research results based upon a blend of
practical and theoretical aspects for multichannel decisions. Based on academic
literature, the authors experience, and discussions with companies, a framework for
Order Fulllment and Logistics Considerations 195
channel selection for physical goods sales to consumers was presented. Inspired by
the challenges faced by a Dutch retailer selling large household items a new heu-
ristic was developed for managing the forward fulllment and forward logistics
channels, which builds upon the academic work of Vidal et al. (2012). As a con-
sequence of taking both practice and theory into consideration in the research,
limitations of the work and possible future work also arise from both viewpoints.
From a practical point of view, we note the following limitations to the forward
channel selection heuristic. The heuristic assumes a setting that is described pri-
marily in terms of the physical locations of the distribution points (typically: shops).
In practice, not all shop managers may be willing to participate, or only to a limited
extent. This may hold in particular when the company uses a franchise structure,
where individual stores each have their individual (local) owners. Furthermore,
depending on the increased product flows at the various locations due to the pro-
posed new conguration, additional storage capacity, material handling equipment
and employees may be required. Or alternatively, product flows may need to be
restricted to comply with current limitations at the various locations. This causes
additional aspects that may not in all cases be reducible to the cost parameters of the
current model. From a theoretical point of view, the channel assignment decisions
of the heuristic are shown to be effective. However, since the instances cannot
easily be solved to optimality, it is unclear as to whether further solution quality
improvements may or may not be possible.
For further research, several aspects can be considered. Firstly, the seven ele-
ments of multichanneling as depicted in Fig. 1, though thoroughly based on litera-
ture and observations in practice, could potentially benet from further renements
that may be obtained from a test of this framework in a number of practical settings.
Secondly, the heuristic for forward channel decisions can be extended in several
ways. A rst and important step in the advancement of the heuristic would require to
allow for multiple different products in the model, such that trade-offs in transport
capacities and costs between product categories can be made explicit. Subsequently,
extensions may include the addition of capacity restrictions or other restrictions at
locations or the inclusion of return flows.
Acknowledgment This study was supported by a grant of the Dutch Institute for Advanced
Logistics (Dinalog).
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