Supermercado 6

Decision Sciences © 2017 Decision Sciences Institute
Volume 00 Number 0
xxxx 2017
Evaluation of Order Fulfillment Options

in Retail Supply Chains
Rafay Ishfaq†
Raymond J. Harbert College of Business, Auburn University, Auburn, AL 36849,
e-mail: rishfaq@auburn.edu
Uzma Raja
Culverhouse College of Commerce, The University of Alabama, Tuscaloosa, AL 35487,
e-mail: uraja@cba.ua.edu
ABSTRACT
Retailers face a major operational challenge in fulfilling online orders while managing
their traditional store-based distribution processes. In this context, the following order
fulfillment options available to retailers are considered: store-facing distribution centers
(DCs), dedicated order fulfillment facilities (DTC), retail stores, and direct-fill by ven-
dors. A framework for the online order fulfillment process is developed to evaluate these
options using operational and financial measures collected from a large U.S. retailer.
The study presents managerial insights regarding each fulfillment option and identifies
operational and cost thresholds where a particular fulfillment option would be preferred.
The results show that due to better order fulfillment efficiency, distribution facilities (DC
and DTC) out-perform fulfillment from stores and vendors. However, retailers can lever-
age their network of stores to overcome the shortfall in store-based fulfillment costs by
focusing on the order delivery process. The analysis presented in this article is useful for
practice as it helps retailers identify options that best suit their order fulfillment strategy.
[Submitted: March 4, 2016. Revised: April 18, 2017. Accepted: April 20, 2017.]
Subject Areas: Order fulfillment, Retail supply chain, and E-commerce.
INTRODUCTION
For the past decade, online retail sales have increased at a faster rate than sales
through retail stores. In 2015, online sales in the United States were estimated at
$341 billion (an increase of 14.6% over the previous year), whereas store sales
during the same period increased by only 1.4% (U.S. Census Bureau, 2015).
The growth of online sales has attracted many “pure-play” brick-and-mortar store
retailers to add the online channel to their business strategy. These retailers seek to
align their traditional store-based distribution processes with the requirements of
the online channel through coordinating demand management and order fulfillment
activities (Ishfaq, Defee, Gibson, & Raja, 2016). This realignment of supply chain
† Corresponding author.
1
2 Evaluation of Order Fulfillment Options in Retail Supply Chains
processes has resulted in the emergence of a retail distribution strategy in which

retailers organize unified order fulfillment processes that utilize different nodes
in the distribution network to fill customers’ online orders. The fulfillment nodes
include retail stores, distribution centers (DCs), order fulfillment facilities and
vendors (Verhoef, Kannan, & Inman, 2015).
While adding the online channel offers retailers access to new customers
and better sales prospects, executing the online order fulfillment process within a
store-based distribution network creates significant operational issues (Metters &
Walton, 2007). For example, consider the differences in the profile of online orders
and store replenishment orders. Online customers buy in small quantities per order
with different delivery (next-day, three-day) and destination (direct to customer
homes or pick-up from local stores) requirements. On the other hand, store replen-
ishment orders are larger in size and require picking and shipping full-case pallet
loads. Filling the respective types of orders requires different order fulfillment
activities and arrangement of resources. Processing high volumes of small size
online orders requires pick-pack-ship activities that are either labor intensive (and
thus costly) or mechanized (which requires significant capital investment).
A key element in the online order fulfillment process is last-mile delivery of
orders. Store-based retailers are not used to providing this service. For decades,
these retailers have successfully handled product flows from their DCs to the stores;
however, delivery of orders to customers’ homes is something new for them, which
they have been struggling to manage (Nicholls & Watson, 2005). The challenge
posed by differences in order fulfillment needs and last-mile delivery has caused a
serious downward pressure on store-based retailers’ financial bottom line (Agatz,
Fleischmann, & Van Nunen, 2008). Our article focuses on the above-mentioned
issues related to order fulfillment and delivery, and presents a study of the order
fulfillment process used by retailers engaged with store and online channels.
In this article, we evaluate different fulfillment and delivery options used by
store-based retailers to serve their online customers. This research setting calls for
an assessment of the current configuration of store-based retailers’ existing distri-
bution networks and their operational arrangements with vendors and third-party
logistics service providers to serve online customers (de Koster, 2002). In this
context, we investigate the following specific research questions: Research Ques-
tion 1: What are the best options available for retailers to leverage different order
fulfillment configurations to fulfill online orders; and Research Question 2: Which
operational elements of the supply chain network structure (warehousing, trans-
portation, inventory, and order delivery) drive retailers’ choice of order fulfillment
strategy.
We develop a modeling framework for the retail distribution system in which
online orders can be filled from different fulfillment nodes. The framework applies
existing constructs of network flows in the operations research literature to a
new study focused on the order fulfillment process. This framework incorporates
different order fulfillment paths and implements the decision logic used by retailers
to select an appropriate mix of order fulfillment options. The selection of fulfillment
options is based on the intrinsic operational attributes; product flows, logistics and
operational costs, and storage limits related to every fulfillment node in the network.
We have used this model to conduct an empirical evaluation of the order fulfillment
Ishfaq and Raja 3
process using real-world data collected from a large U.S. retail firm by considering
various configurations within an experimental design study. Results are analyzed
to develop managerial insights regarding operational factors that affect fulfillment
choices in a retail supply chain.
BACKGROUND
In retailing, the physical (stores) and virtual (online and catalog) channels of-
fer distinct mediums through which customers and retailers interact (Metters &
Walton, 2007). In recent years, customers and retailers have started to engage
these channels in an integrated manner (Bell, Gallino, & Moreno, 2014). In this
context, customers use multiple channels interchangeably during the purchase
process (Verhoef et al., 2015). To serve customers, store-based retailers use the
existing distribution resources organized for product flows in the store network to
fill orders from online customers. In this setting, retailers can use inventory stored
across multiple channels, as a channel-agnostic resource, to serve customers in a
seamless manner. In this context, online orders can be processed and shipped from
anywhere in the distribution network through a mix of fulfillment options selected
on the basis of supply chain economics (Hübner, Wollenburg, Holzapfel, & Mena,
2016).
In this article we are focused on the retailer-side logistics of the order ful-
fillment process. Retailers have different fulfillment options that can be employed
to fill customer demand (see Figure 1). These options include the use of existing
DCs to fill online orders, known as integrated fulfillment (Ishfaq et al., 2016). In
this case, retailers develop unified operational processes that combine warehous-
ing activities for store and online channels. The other option available to retailers
is to use dedicated direct-to-customer order fulfillment centers. This dedicated
fulfillment method requires a significant capital investment, process redesign, and
coordinated product flows (Lummus & Vokurka, 2002). A critical threshold of
online sales is needed to justify the high operating costs and inventory risks due to
Figure 1: Order fulfillment paths in a retail supply chain.
Note: Vendors (V), distribution centers (DC), direct-to-customer fulfillment centers (DTC), retail stores (R).
uncertain seasonal variations of demand in the online channel. Another approach

used by retailers is to leverage inventory in local stores to fill online orders, known
as store fulfillment (Agatz et al., 2008). If inventory investments and operational
costs of supporting multiple channels is deemed prohibitive, retailers can also use
their vendors to support online sales. In vendor fulfillment, retailers assign orders
from online customers to vendors for fulfillment. The vendor fulfillment option
allows retailers to sell additional products online without stocking inventory in the
store and without the operational burden of filling online orders.
Another key element of the order fulfillment process is order delivery (Lee
& Whang, 2001). Retailers offer different delivery options as a way to attract on-
line customers. These options vary in terms of speed (one-day, three-day delivery)
and destination (pickup from store or deliver to home). The choice depends on
the economics of inventory and delivery costs. The physical separation between
customer-specified destinations and location of inventory affects cost and speed
with which online orders can be delivered (Rabinovich & Bailey, 2004). Whereas
shipments from DCs to stores move in large quantities according to preplanned
shipping schedules, direct shipments to customers are more complex due to dif-
ferent service options, variations in volume, number of destinations to be served,
and differences in weight and volume. This article addresses these issues in the
context of strategic planning and coordination of order fulfillment activities by the
retailers.
The rest of the article is organized as follows. In the next section, we review
current literature to position our article and highlight its contributions. A modeling
framework of the order fulfillment process is presented in the following section.
Next, details about the data collected from a large retail firm is presented, followed
by a detailed evaluation of different operational scenarios based on realistic situa-
tions faced by the focal firm. The article concludes with a discussion of the results
and managerial insights.
LITERATURE REVIEW
The strategic planning of online order fulfillment is a relatively new area of research
in retail supply chain management (Agatz et al., 2008). Most of the current litera-
ture in this area has focused on evaluating system performance while considering a
singular fulfillment option. In these papers, evaluation of the order fulfillment pro-
cess is primarily based on transportation and inventory costs. However, in modern
retail supply chains, the multiple distribution nodes (vendors, fulfillment centers,
store-facing DCs and retail stores) involved in the order fulfillment process require
researchers’ attention to explore the underlying complex issues. This gap in litera-
ture has prompted a call for studies that can help retailers realign their operational
capabilities to integrate online and store channels within their existing distribution
networks (Ishfaq et al., 2016; Xia & Zhang, 2010). This section reviews existing
literature on retail distribution networks and highlights the research contributions
of our article.
One of the earliest works related to our research is Alptekinoğlu and Tang
(2005). This article considered a retail distribution system that serves customers
in the online and in-store channels. Their model combines demand from these
Ishfaq and Raja 5
channels and allocates it to different DCs based on DC-to-store and DC-to-

customer transportation and inventory carrying costs. The authors identified their
work as a building block for more complex retail distribution networks and sug-
gested multiple extensions that include consideration for order fulfillment costs,
order delivery costs, and differentiation in distribution costs at different supply
chain echelons (stores vs. DCs vs. fulfillment centers). Our article incorporates
these extensions and specifically includes all fulfillment options currently used in
retail supply chains.
The use of retail stores to fill online demand is addressed by Aksen and
Altinkemer (2008). They developed a model for a retailer to decide which stores
in the network will be used to fill online orders, referred to as click-and-mortar
stores. The choice of stores to be used for order fulfillment was based on the fixed
operating costs and the retailer’s cost of the last-mile delivery of online orders
from stores to customers’ homes. The findings of this study are limited to store
fulfillment and thus options of filling orders from the retailer’s store-facing DCs or
dedicated DTC fulfillment centers were not considered. Mahar et al. (2012) also
focused on filling online orders through retail stores. Orders can be filled either
by the DCs and shipped to local stores for pickup or orders are filled using local
stores’ inventory. The results in this study showed that it is better to use a subset of
stores within a region for online order fulfillment instead of using all retail stores.
Xu et al. (2009) considered the option of using DTC fulfillment facilities to fill
customers online orders. Their model selects DTC facilities to fill orders based on
product availability within the retailer’s entire DTC network. This study considered
the case of pure-play online retailers (i.e., only the DTC fulfillment option was
included). A selection approach within a heuristic scheme was developed based
on allocating customer orders to fulfillment facilities in the network such that the
shipping costs and number of order deliveries were minimized.
Bretthauer et al. (2010) considered the case in which a retailer would consider
a combined use of its stores as well as dedicated DTC fulfillment facilities. This
study showed that retailers with an equal level of in-store and online demand may
choose to use stores for order fulfillment over DTC fulfillment. Whereas, in the
case when the retailer has higher sales online than in stores, centralized DTC
fulfillment centers will be more useful. These results were based on the trade-
off among transportation costs and fixed operating costs of the order fulfillment
centers.
Acimovic and Graves (2015) considered a case in which the retailer may
delay fulfillment decisions to reduce the chance of shipping orders from farther
away than necessary. In this setting, their paper studied the impact of the timing of
order fulfillment decisions on total order delivery costs. This setting is also studied
by Torabi et al. (2015); they developed a model that considers the transportation
costs of filling an entire online order from the closest facility or splitting the order
among facilities if inventory in a particular DTC facility is insufficient. This article
is focused on identifying the best order fulfillment locations given the delivery
times selected by customers at the time of placing the orders. These two papers
are limited in the context of our study due to the consideration of a single (DTC)
fulfillment option with no fulfillment role for retail stores, vendors or store-facing
DCs. Furthermore, the order fulfillment choices in these papers are based solely
on transportation costs.
In light of the discussion presented above, our article fills a number of gaps
in literature (see Table 1). First, our study includes all fulfillment options (retail
stores, dedicated fulfillment centers, store-facing DCs, and vendors) simultane-
ously within a retail supply chain setting. Different options are explicitly included
through multiple product flows, and modeled with parametric details without as-
signing a particular customer segment to a specific fulfillment option. Second,
we develop a modeling framework that selects an optimal mix of fulfillment op-
tions based on the relevant logistics costs and order delivery requirements. Third,
our model incorporates the underlying differences among different fulfillment op-
tions by considering: (i) order fulfilments costs that differ across fulfillment nodes
due to labor wages, facility layouts, and variations in pick-pack-ship operations;
(ii) different order delivery and inventory costs that vary across echelons, that is,
stores versus DCs; and (iii) different delivery considerations, such as pick-from-
store and free shipping. These cost differentials play an important role for retailers
in identifying the best mix of fulfillment options. In this regard, our study extends
the order fulfillment literature by presenting a unified framework of the order ful-
fillment process in retail supply chains and an empirically grounded evaluation to
gain managerial insights useful for the practice of retail supply chain management.
In addressing issues related to the order fulfillment process, we have followed
the deterministic demand approach, similar to previous studies in this area. The
use of deterministic demand in order fulfillment research is also consistent with
practice in retail supply chain. Retailers use estimates of mean total demand to
develop strategic level plans for order fulfillment activities. These retailers manage
demand variability at the operational level through a distributed order management
system that handles this issue by leveraging inventory stocked at multiple locations
in the retailer’s distribution network (Chao & Norton, 2016; Gibson, Defee, &
Ishfaq, 2015). Some papers discussed above (see Table 1) have used a stochastic
demand approach. Stochastic demand elements in these papers address supply and
inventory replenishment issues. Our article is focused not on these issues, but rather
on a different area in the retail supply chain, that is, options used to fill and deliver
customers’ online orders. We have discussed such papers in the literature review
to account for elements in these studies that relates to order fulfillment, which we
note is also based on mean demand estimates (i.e., deterministic demand), same
as in our article.
RETAIL DISTRIBUTION SYSTEM

This section presents a framework of the order fulfillment process in a retail
distribution network (see Figure 2). In this framework, facilities are represented as
nodes and arcs to indicate the flow of products and orders. Collectively, all nodes
and arcs in the network are represented by set (indexed by ω) and set E (indexed
by e), respectively. The retailer operates a number of distribution facilities (j ∈ D)
and retail stores (r ∈ R) in different markets (m ∈ M). The assortment of products
sold by the retailer is represented by (k ∈ K) that have demand πtkm in market m
during a selling season (t ∈ T). The proportion of demand in the online channel
Table 1: Literature review and research contributions.
Bretthauer,
Alptekinoğlu Aksen and Mahar, and Mahar, Torabi, Hassini,
and Tang Altinkemer Xu, Allgor, and Venakataramanan Salzarulo, and Acimovic and and Jeihoonian
Contributions Our Article (2005) (2008) Graves (2009) (2010) Wright (2012) Graves (2015) (2015)
Ishfaq and Raja
Order fulfillment
options: √
Vendors √ –
√ – – – – – –
Distribution – – – – – –
centers √ √ √ √ √
DTC fulfillment – – –
centers √ √ √ √
Retail stores – – – –
Considerations for: √ √ √ √
Inventory costs √ √ –
√ – √ –
√ –
√
Transportation – –
costs √ √
Order fulfillment – – – – – –
costs √
Cost of goods √ – –
√ –
√ – – –
√ –
√
Deterministic – – –
demand √
Cost differentiation – – – – – – –
by echelon √ √ √ √
Multiple planning – – – –
periods √ √
Inventory limits by – – – – – –
echelon √ √ √
Fixed operational – – – – –
costs
7
Figure 2: Order fulfillment framework.
is represented by ptkm . The retailer purchases products from vendors (j ∈ V) for

a unit cost-of-goods γωk for sale through ω that does not change through selling
seasons. Note that γVk ≥ γωk : ω ∈ \ V because vendors do not offer volume
discount for smaller quantity orders shipped directly to customers (Ayanso, Diaby,
& Nair, 2006).
Products flow in the retailer’s distribution network over arcs represented by
sets EI and EO for the inbound and outbound shipments, respectively. For each
node j, sets Hj and Tj represent the arcs that start and end at node j, respectively.
The quantity of product k shipped over arc e during time t is given by the decision
variables Xetk . The unit inbound shipping cost for product k is represented by
the cost parameter cek : e ∈ EI and unit outbound shipping cost is represented by
cek : e ∈ EO . Each unit of product k requires a storage space of α k , whereas the
total available storage space at location ω ∈ is given by κω . The end-of-season
k
inventory Iωt at location ω incurs inventory holding costs at the rate of hkω per
unit.
The framework incorporates four options to fill online demand (see
Figure 2). These fulfillment options are based on the location of the inventory
used to fill online orders. One of the options is to fill online orders from DC
inventory (the same DCs that replenish retail stores), represented by set D, that
Ishfaq and Raja 9
is, integrated fulfillment. The other option is for the retailer to operate separate
direct-to-customer (DTC) fulfillment centers, represented by set F, which serve
online demand exclusively, that is, dedicated fulfillment. However, in this case
there are additional costs related to operating these facilities. We use parameter
fj ∈F to represent the additional financial burden of operating separate fulfillment
centers specifically for online orders. In the former case (integrated fulfillment),
online orders are filled using existing DCs resulting in no additional fixed costs.
In that sense, we use fj to signify the additional financial burden of operating
separate fulfillment facilities over existing DCs. Another fulfillment option used
by retailers is to fill online orders directly from vendors, represented by set V (i.e.,
vendor fulfillment). This option can be used by the retailer to sell an assortment of
products in the online channel that it does not hold in stock. The fourth option is
to fulfill online orders from retail stores (i.e., store fulfillment), where orders are
shipped directly from retail stores to online customers.
The retailer fills online demand from inventory held at any of the above-
mentioned stocking locations. The fulfillment and order delivery costs vary de-
pending on the fulfillment node used. Based on these considerations, the best order
fulfillment node can be identified. These choices are represented by decision vari-
km
ables Sωt to identify the number of orders of product k in market m using inventory
located at node ω ∈ , during selling season t.
The framework discussed above provides a useful mechanism to evaluate
trade-offs in the order fulfillment process within retail distribution. For example,
the fulfillment of online orders from retail stores may have the lowest last-mile
delivery cost because of the stores’ proximity to local customers. However, if
orders are filled from retail stores, order picking and packing costs would be quite
different compared to filling orders from DCs. Unlike a DC, the display shelves
and inventory placement in a retail store are set according to marketing and sales
considerations. These considerations may limit retailers’ ability to efficiently pick
items for order fulfillment, resulting in higher costs. Furthermore, the high real
estate cost of urban and suburban retail outlets and significant inventory carrying
costs to hold stock for the purpose of filling online orders raise concerns.
A retailer may decide that concerns about high order fulfillment and inventory
holding costs at retail stores warrant the use of existing DCs as order fulfillment
nodes for the online channel. However, note that retailers’ DCs are organized to
efficiently stock or flow-through pallet-size or full-case loads—a configuration
not efficient for filling online orders. This dichotomy raises concerns about the
suitability of using store-facing DCs for filling online orders.
The above-mentioned dilemma can be resolved by using dedicated, direct-
to-customer (DTC) fulfillment centers which are configured exclusively for filling
online orders. However, this option results in higher operating costs, as well as
additional system-level inventory under the portfolio effect theory (Croxton &
Zinn, 2005). Hence, to achieve economies of scale, retailers favor using a few
centrally located, large DTC fulfillment centers. The framework captures these
trade-offs through inventory, transportation, warehousing operations, and delivery
processes. The integrated decision as to which order fulfillment node is most
suitable for a given scenario and how to incorporate inventory to support order
fulfillment choices are included in the modeling framework. We use this framework
and the mathematical representation of the retail distribution system described

above to evaluate different order fulfillment options for retailers.
As per current practice, store-based retailers evaluate different fulfillment
options to serve their customers based on the least cost-to-serve (Gibson et al.,
2015). This criterion covers relevant supply chain activities, such as shipping prod-
ucts within the network of distribution facilities and stores, the order fulfillment
process, inventory placement, and order delivery arrangements with third-party
carriers. The following mathematical representation of the retail fulfillment net-
work is developed in light of the framework discussed above for use with empirical
data to identify least cost-to-serve fulfillment options.
Model Formulation:
Parameters:
πtkm = Demand of product k in market m in period t,

ptkm = Proportion of product k demand online in market m in period t,
γωk = Unit cost-of-goods for product k sold through ω,
cek = Unit cost of shipping k through arc e ∈ EI ∪ EO ,
dωk = Unit cost of filling an order of product k from ω,
δωkm = Unit cost of delivering an order of product k from ω to market m,
κω = Storage allocation for inventory at location ω,
hkω = Unit inventory holding cost for k at ω per period,
α k = Unit storage requirements of k,
M = Large number, and
fj = Operating cost per unit storage capacity at DTC j ∈ F.
System variables:
Xetk ≥ 0, Units of k shipped through e ∈ EI ∪ EO in t,

Yj = 1, if a DTC DC j is used for online channel, 0 otherwise, and
k
Iωt ≥ 0, Inventory of product k held at ω at the end of t.
Decision variables:
km
Sωt ≥ 0, Orders filled from ω for product k in market m during period t.
k
(Q) min km
Sωt γω + dωk + δωkm
ω∈,t∈T,k∈K,m∈M

+ fj (κj )Yj + cek Xetk + hkω Iωt
k
(1)
j ∈F e∈EO ,t∈T,k∈K ω∈,t∈T,k∈K

subject to: km
Sωt ≤ ptkm (πtkm ) ; ∀k ∈ K, m ∈ M, t ∈ T (2)
ω∈
Ishfaq and Raja 11

Xetk = t +
Sjkm Xetk + Ijkt − Ijk(t−1) ; ∀j ∈ D, k ∈ K, t ∈ T (3)
e∈Hj m∈M e∈Tj

Xetk = t + Ij t − Ij (t−1)
Sjkm k k
; ∀j ∈ R ∪ F, k ∈ K, t ∈ T (4)
e∈Hj m∈M

α k Iωt
k
≤ κω ; ∀ω ∈ \ V, t ∈ T (5)
k∈K

Xjkt ≤ MYj ; ∀j ∈ F (6)
k∈K,t∈T
km
Sωt , Xetk , Iωt
k
≥ 0, Yj ∈ {0, 1}.
The objective of the model is to find the least cost fulfillment option. The first
term of the objective function (1) computes the total cost of order fulfillment, order
delivery, and cost of goods for different fulfillment choices represented by decision
km
variables Sωt . The second term is related to retailer’s decision to use dedicated
DTC fulfillment center(s), which would add operating costs for such facilities.
The third term computes the total outbound transportation costs from DCs to retail
stores. The last term computes the total inventory holding cost of the system. The
order fulfillment choices are made while considering a number of requirements
related to supply, inventory and product sales. In constraints (2), the model ensures
online demand is fully filled from available inventory. The constraints in (3) and
(4) describe inbound/outbound product flows. The availability of products at DC
j is covered by supply from the vendors (Xetk ) and the carryover inventory from
k
the previous period (Ij,t−1 ). The inbound supply variables (Xetk ) are defined over
a subset of edges e ∈ Tj ⊆ EI associated with a fulfillment point j, that consists
of all edges which terminate at j. The outbound flows in (3) include replenishment
shipments from DCs to retail stores and orders sold/shipped to customers. Note
that outbound product flows Xetk are defined over a subset e ∈ Hj ⊆ EO associated
with node j that comprises all edges originating at j. Similar to DCs, product
flow balance requirements are also described for retail stores and DTC fulfillment
facilities through constraints (4). Note that in (4), all outbound product flows
are related to orders delivered to different markets. Constraints in (5) restrict
inventory due to limited storage space. The constraints in (6) ensure that only
operational DTC fulfillment centers are considered for the dedicated fulfillment
option.
The model discussed above incorporates different fulfillment paths to serve
online customers and fill orders using a mix of fulfillment options based on the
relevant logistics costs and order delivery requirements. The model incorporates
the underlying differentiation of fulfillment options by considering: (i) order ful-
filments costs that differ across facilities due to labor wages, facility layouts, and
variations in pick-pack-ship operations; (ii) online orders have different (last-mile)
delivery requirements; (iii) inventory costs vary across echelons (i.e., store vs.
DCs); and (iv) there are delivery considerations, such as pick-from-store and free
shipping. Our model captures these issues through model parameters, grounded in
empirical data and the model/analysis setting developed through discussions with
the retail supply chain executives consulted for this research.
The modeling framework and resulting mathematical representation of the
retail distribution system discussed above was used with data collected from a
large store-based retail firm in the United States. These data (described in the next
section) allowed us to create a base-case setting representing the legacy distribution
network used by the retailer. Using these data within a factorial design research
study, we evaluated order fulfillment options through the analysis of different
scenarios and the evaluation of trade-offs among order fulfillment, order delivery,
inventory, and transportation.
RESEARCH STUDY
Research Site
For this research study, we collected data from a large retail firm operating more
than 5,000 stores in the United States. The retailer sells a wide assortment of prod-
ucts, in-store and online, including home and office supplies, health and beauty
products, and pet supplies. The retailer offers national brands from leading man-
ufacturers (such as Proctor and Gamble, Nestle, and Unilever) and private label
selection of comparable quality. The retailer competes with other retail firms by
offering highly competitive prices on private label and national brands sold in its
conveniently located small-box stores. Most of the merchandise flows through the
retailer’s distribution network of 12 DCs, and is delivered to stores by third-party
transportation carriers.
This study focuses on the retailer’s southeastern U.S. market, which com-
prises of seven states: Alabama (AL), Florida (FL), Georgia (GA), Mississippi
(MS), North Carolina (NC), South Carolina (SC), and Tennessee (TN). The south-
eastern region was selected due to its significance for the retailer. The retailer has
its corporate headquarters in this region where it began its operations four decades
ago. The retailer has a deep understanding of the local markets and enjoys brand
recognition among customers in the region. It also has strong relationships with
suppliers and transportation carriers in this area. The southeastern U.S. market
accounts for 51% of the retailer’s total sales. To select appropriate markets in the
region, historical sales data were extracted for all cities served by the retailer. The
markets were rank ordered according to aggregate annual sales and the top 10%
of markets in each of the seven states were selected. This process identified the 35
markets (M) included in the research study.
Order Fulfillment and Delivery Processes

The focal firm has an extensive retail and distribution network in the selected region.
It operates four DCs, located in Alabama, Florida, Mississippi, and South Carolina.
Additionally, two out-of-region DCs, in Kentucky (KY) and Virginia (VA), also
serve stores in the southeastern region. The size of the DCs range between 740,000
Ishfaq and Raja 13
to 1,300,000 sq-ft with an average storage-space utilization factor of 0.93. As an

alternative, two candidate locations for direct-to-customer fulfillment centers at
Vance, AL, and Augusta, GA, were considered.
For the purpose of this study, products were segmented using two price
threshold values: $7.99 and $14.99. These threshold values separated the retailer’s
merchandise into three groups, with approximately one third of merchandise in
each group. Four items were randomly selected from the “less than $7.99” category,
four from the “$8.00 to $14.99” category and two from the “$15.00 and above”
category. In setting these price thresholds, we confirmed that the online offerings
of other retailers have similar pricing and product mix. In a survey of the Web sites
of two major retailers (Target and Walmart), we found similar proportions of items
being sold online in the price ranges used in our study.
The historical demand data of selected stock keeping units (SKUs) (k ∈ K)
were extracted from the retailer’s enterprise resource planning system. An average
of 9,975 orders of the selected SKUs were shipped each month. The number of
orders across the SKUs ranged between 700 (for SKU3) and 1,365 (for SKU5).
We conducted the Dickey–Fuller test to confirm the demand data have a stationary
mean for selected SKUs (Dickey & Fuller, 1981). The mean monthly demand rates
of 710, 1190, 700, 875, 1365, 1280, 980, 1260, 840, and 805 were used in the study
for SKU1 to SKU10, respectively.
The replenishment history was used to extract information regarding the
vendors supplying each product (v ∈ V), purchase cost (γ k ), and delivery charges
(cek : e ∈ EI ). The outbound transportation costs (cek : e ∈ EO ) from DCs to stores
(r ∈ R) were calculated from shipment records at respective facilities. The storage
DC space available for selected products in the DCs was estimated from the
proportion of monthly order quantity shipped from each DC. The aggregate storage
capacity for all products in each DC was used for parameter κj (j ∈ D). A similar
criterion was used to determine the available space in retail stores (κj : j ∈ R)
using an estimated 10,000 sq-ft of selling space in a typical retailer’s store. To
estimate the unit storage space requirement of a product, a value of α k = 1 was
used. This is the standardized unit-load size (1 cubic-ft) used by the retailer for
planning purposes. The annual inventory holding cost rates were set at 25% and
40% for DCs and retail stores, respectively (Fares & Tebbett, 2015; Ganeshan,
1999).
As discussed earlier, online orders may be handled at different fulfillment
nodes in the network: retail stores, DCs, direct-to-customer fulfillment centers, or
shipped directly from the vendor. The simplest fulfillment option for the retailer is
to pass customer orders directly to its vendors. This option requires no additional
operational, or managerial action by the retailer. The retailer pays the vendor an
order processing fee of $5.00 per order (eCommerce, 2015; Entrepreneur, 2015).
Note that under this option, vendors do not offer a volume price discount to the
retailer, but the retailer incurs no additional costs, except shipping costs.
The retailer may also fill online orders from one of the existing DCs in the
network. The fulfillment costs in a DC depend on different cost centers, including
direct/indirect labor and efficiency of picking and packing operations. The focal
retail firm estimated that filling online orders from its current DCs (djk , j ∈ D)
cost an average of $7.00 per order (Barry, 2012). The order delivery costs were
set according to zip codes of origins (DCs and DTCs) and destinations (cities).
These costs were calculated from zone-based Commercial-plus Parcel shipping
rates charged by the U.S. Postal Service (USPS, 2015) for package deliveries.
Another fulfillment option available to retailers is retail stores, which is
useful for orders to be delivered in locations close to retailers’ stores. However,
this fulfillment option requires pushing inventory to stores where real estate costs
and employee wages are higher compared to the off-site locations of DCs. The store
fulfillment cost was set at $10.00 per order, 30% higher than DC-based fulfillment
(Rueter, 2013).
The retailer may use dedicated direct-to-customer fulfillment centers. This
option allows retailers to leverage economies-of-scale in handling large volumes
of small-sized orders. The cost attributes related to the DTC facilities in AL and
GA are evaluated in the model to decide whether to utilize these facilities, that
is, Yj ∈ {0, 1}. A decision to operate a dedicated DTC facility (Yj = 1) incurs
additional operating costs (fj ) for the retailer. The unit warehousing cost was set
at $10.00 per sq-ft-per year which is the average cost of warehousing operations in
the southeastern U.S. region (Rogers, 2010). To estimate order fulfillment charges
at a dedicated DTC, cost estimates from Fulfilment by Amazon (FBA) services
were used. Amazon operates dedicated e-commerce order fulfillment centers with a
level of efficiency that is an industry benchmark. The fulfillment services provided
by Amazon include order picking, packing and shipping, as well as managing
inventory for their clients. The FBA fulfillment charge for online orders is $5.25
per order, which includes $4.50 for order handling (including standard shipping
for items weighing up to 15 lbs.) and $0.75 for pick and pack charges (Amazon,
2015). A 12-month planning period (|T| = 12) is used in the study.
Research Design
The data collected from the focal firm and secondary sources were evaluated using
a factorial experiment design approach. The key factors and the factor levels used
in the study were selected in consultation with supply chain executives to ensure
validity. This approach allowed us to incorporate sufficient variation in the case
data to generalize the findings of this study. The variations in factor levels are also
useful for developing managerial insights by exploring how changes in parameters’
values affect order fulfillment choices.
The factorial design is based on following key factors: (i) fulfillment cost dωk ,
(ii) delivery cost δωkm , (iii) DTC operational cost fj , and (iv) inventory allocation
κω . Three different levels are used for each factor (see Table 2). The factor levels
represent associated parameter settings, for example, the store order fulfillment
cost factor is set at following three levels: L1 (0.90dR = $9.00), L2 (0.80dR =
$8.00), and L3 (0.70dR = $7.00). Note that (1.00) levels in Table 2 represent data
collected from the retail firm (referred to as base-case). In the factorial design,
factors related to DC fulfillment were fixed at the base-case level. This setting would
help us analyze corresponding changes in the use of order fulfillment options due
to changes in other factors.
The delivery cost factor levels were used as multipliers with the associated
parameter (e.g., level L2 of store order delivery costs scales δR values at 80%
Ishfaq and Raja 15
Table 2: Factorial study design.

Factor Levels
Factors Base Case Parameter L1 L2 L3
Fulfillment cost:
Store dR $9.00 $8.00 $7.00
(0.90)dR (0.80)dR (0.70)dR
DTC dF $6.65 $5.95 $5.25
(0.95)dD (0.85)dD (0.75)dD
Vendor dV $5.00 $4.00 $3.00
(1.00)dV (0.80)dV (0.60)dV
Delivery cost:
Store δR (1.00)δR (0.80)δR (0.60)δR
DTC δF (1.00)δF (0.90)δF (0.80)δF
Vendor δV (1.00)δV (0.80)δV (0.60)δV
DTC unit operational cost fF $15.00 $10.00 $5.00
(1.50)fF (1.00)fF (0.50)fF
Retail inventory allocation κR $270 $240 $210
(0.90)κR (0.80)κR (0.70)κR
of base-case data values). Note that factors in the study are set in the context of
general merchandise retail that do not include large and bulky items. Under this
setting, we did not find fulfillment-related costs to vary much across product types.
Thus, factor levels were based on cost averages across sample products. Response
variables in the analysis represent a proportion of online demand filled by each
fulfillment option, that is, there are four response variables for each factor-level
combination presented in Table 2.
Each combination of the factor levels is equivalent to a specific business
scenario based on the underlying model parameter values. With eight factors at
three levels each, a total of 6,561 scenarios were evaluated. The resulting scenario
data and parameter settings were recorded in separate data files. The respective
data files were linked to the model developed earlier and solved using commercial
solver CPELX through AMPL modeling interface. The optimal solution output
yields best order fulfillment options based on the least cost-to-serve approach
currently practiced by store-based retailers (Gibson et al., 2015). The values of the
response variables were recorded from the output of each test scenario.
RESULTS AND ANALYSIS

Order Fulfillment: Fractional Multinomial Logit Model
The results were analyzed to evaluate the effect of order fulfillment, order delivery,
warehousing, shipping, and inventory-related factors on dependent variables (pro-
portion of orders filled by each fulfillment option). The nature of our data requires
fitting a model that can identify the proportion of orders filled by each of the four
fulfillment options. Thus, dependent variables in our study are not continuous,
rather they are proportions with values between 0 and 1 that collectively sum to
1 for each data observation. For these type of data, traditional estimation meth-
ods (linear regression, general linear method, etc.) are not appropriate (Ramalho,
Ramalho, & Murteira, 2011).
To analyze data with a fractional response variable, the fractional multino-
mial logit model (FMlogit) technique is used (Papke & Wooldridge, 1996). This
technique combines multivariate fractional logit and multinomial logit such that
the model output represents the expected values of the proportions for different
response variables, all of which sum to 1. In our case, proportions represent use of
different fulfillment options used to fill online orders. FMlogit model measures the
changes in multiple response variables simultaneously as a measure of the effects
of independent variables. Consider a random sample of i = 1, ..., N observations
of orders, each with M outcomes of fulfillment choices. In our study, M = 4, which
corresponds to each of the order fulfillment types. Given sik represents the kth out-
come for observation i, and xi , i = 1, ..., N , is a vector of exogenous covariates.
The FMlogit model assumes that M conditional means have a multinomial logit
functional form in linear indices as:
exp(xβk )
E[sk |x] = Gk (x; β) = M .
m=1 exp(xβm )
We can define a multinomial logit quasi-likelihood function L(β) that uses the
observed shares sik [0, 1] in place of a binary indicator that would otherwise be
used in multinomial functions:

N
M
L(β) = Gm (xi ; β)sim .
i=1 m=1
The parameters of the FMlogit model are obtained using a quasi-maximum

likelihood estimator for the fractional response model without an ad hoc transfor-
mation of boundary values (Mullahy, 2015). Because this method accounts for all
outcome options that add up to 1, there is no issue of violating the Independence of
Irrelevant Alternatives (IIA) assumption. The statistical significance of the overall
FMlogit model is tested through the chi-square test statistic. This statistic evaluates
the null hypothesis that none of the independent variables affect the response vari-
able. The null hypothesis is rejected for p-value less than the level of significance.
Similarly, statistical significance of the independent variables is tested through the
z-statistic and its p-value, which corresponds to the null-hypothesis that respective
terms in the model are equal to zero. A p-value less than the .05 significance level
provides statistical evidence to reject the null-hypothesis.
Our data set consists of 6,561 combinations of independent variable values.
The corresponding choice of the fulfillment option is represented by the depen-
dent variables: DTC[p], DC[p], R[p], and V[p]. Table 3 summarizes some basic
descriptive statistics about the response variables. We used STATA code developed
by Buis (2008) for estimating the parameters of the FMLogit model. The output
of the model for beta coefficients, z-statistic and its p-value were recorded for all
levels of the response variables (see Table 4). The test statistics reported in Table 4
(see last row) indicate that factional multinomial model converged on a log pseudo-
likelihood of −3,064.97 with a Wald chi-squared of 23,869. A high fit between
Ishfaq and Raja 17
data and predicted values from the model was recorded (Prob > χ 2 = .000). The
beta coefficients predicted from the estimation of the fractional multinomial logit
model were used to obtain average marginal effects for every independent variable
that are also reported in Table 2. Average marginal effects that are statistically
different from zero at 1% and 5% levels are indicated with two and one asterisks,
respectively.
Each coefficient in Table 4 represents the marginal change in fulfillment
options as a result of a unit change in the independent variables. For example,
the marginal effect for dF under DTC[p] is −0.0915, which suggests that a unit
increase in DTC fulfillment cost is associated with a decrease of 9.15% in the use
of the DTC fulfillment option. Because all fulfillment options must sum to 1, this
shift would mean that some orders will be filled by other fulfillment options. The
results show that a big share of these orders will be filled using DC fulfillment
(coefficient = 0.0852). Similarly, a unit increase in the vendor fulfillment fee dV
would result in a reduction of 6.29% in use of the vendor fulfillment option V[p].
These orders are shifted to DTC for fulfillment (coefficient= +0.0697).
The results show that orders that are filled through DCs and DTCs would
shift between these fulfillment options under a marginal effect due to changes
in relevant (fulfillment and delivery) costs. This effect is seen for dF , fF , and δF
variables. For example, a unit change in fF would shift an equal proportion of
orders from DTC fulfillment (−7.31%) to DC fulfillment (+6.88%). It is also
interesting to note that while both fulfillment costs and order delivery costs show
significant effect on the choice of order fulfillment option, the scale of effect for
fulfillment costs is much higher than that for order delivery costs. For example, a
unit increase in delivery costs δF would reduce DTC fulfillment by 5.69% whereas
unit change in fulfillment costs would reduce DTC use by 9.15%. We explore these
dynamics in more depth later.
The marginal effects for the order delivery costs are more prominent on
vendor fulfillment option than the store fulfillment options. A unit increase in
delivery costs reduces use of store fulfillment by 1.23% and vendor fulfillment by
5.02%. The small scale of the effect on store fulfillment can be explained by the
small use of this fulfillment option for most combinations of factor levels in the
factorial design. We investigate this aspect in more detail later.
The discussion above is based on a full-model analysis using the fractional
multinomial logit model approach. This analysis identified the effects of different
factors on the response variables: DTC[p], DC[p], R[p], and V[p]. In the next step of
the analysis, we focus specifically on two key elements: order fulfillment and order
delivery, in terms of how changes in these factors would affect the retailer’s use
Table 3: Summary statistics of response variables.

Summary Statistics DTC[p] DC[p] R[p] V[p]
Mean .802 .766 .268 .352

Std. dev. .301 .194 .279 .269
Min. .000 .000 .000 .000
Max. 1.000 1.000 1.000 .750
Table 4: Average marginal effects estimated by fractional multinomial logit.

Response Variables
DTC[p] DC[p] R[p] V[p]
Ind. variable: dF
Coefficient −0.0915** 0.0852** 0.0001** 0.0062**
Std. error 0.0134 0.0124 0.0000 0.0018
z-value −68.16 68.34 17.13 33.50
Ind. variable: dV
Coefficient 0.0697** −0.0068 0.0001 −0.0629**
Std. error 0.0066 0.0061 0 0.0015
z-value 10.44 −1.11 −2.61 −39.7
Ind. variable: dR
Coefficient −0.009 0.0155** −0.0024** −0.0041
Std. error 0.0062 0.0059 0.0001 0.0007
z-value −1.43 2.60 −18.39 −5.38
Ind. variable: fF
Coefficient −0.0731** 0.0688** 0.0001** 0.0043**
Std. error 0.0009 0.0009 0.0000 0.0001
z-value −73.59 74.72 17.29 30.96
Ind. variable: δF
Coefficient −0.0569** 0.0535** 0.0000** 0.0033**
Std. error 0.0856 0.0800 0.0004 0.0115
z-value −66.53 66.92 16.31 29.10
Ind. variable: δV
Coefficient 0.0603** −0.0100** −0.0001 −0.0502**
Std. error 0.0365 0.0326 0.0001 0.0105
z-value 16.52 −3.08 −0.76 −47.52
Ind. variable: δR
Coefficient −0.0459 0.0787** −0.0123** −0.0205**
Std. error 0.0314 0.0297 0.0006 0.0037
z-value −1.46 2.64 −18.17 −5.45
Ind. variable: κR
Coefficient 0.0162 −0.0187 0.0015** 0.0011
Std. error 0.0302 0.0286 0.0001 0.0034
z-value 0.53 −0.65 14.86 0.31
Goodness-of-fit Wald χ 2 = 23,869
statistics
Log pseudolikelihood = −3,064.97
Prob > χ 2 = .000
Note: Statistical significance: **p < .01; *p < .05.
of respective fulfillment options. The objective of this detailed analysis (discussed

later) is to seek managerial insights regrading cost thresholds to understand shifts in
the use of order fulfillment options. The interpretation of these shifts is meaningful
via comparison of different scenarios when the retail firm operates under its current
setting, as represented by the base case. This understanding will guide retailers to
set operational targets to achieve certain cost thresholds to promote or sustain use
of different fulfillment options.
Ishfaq and Raja 19
Table 5: DTC-fulfillment: Order fulfillment and warehouse operating costs.

DTC Warehousing Costs
DTC Order Fulfillment Costs fF = $5.00 fF = $10.00 fF = $15.00
dF ( ddDF ) F D F D F D
$5.25 0.75 100% − 100% − 75% 25%

$5.95 0.85 100% − 65% 35% − 100%
$6.65 0.95 − 100% − 100% − 100%
Dedicated (DTC) Fulfillment: Impact of Order Delivery, Order

Fulfillment, and Warehouse Operating Costs
The DTC fulfillment option allows retailers to operate dedicated facilities specifi-
cally for online orders. These facilities can process online orders more efficiency
than store-facing DCs. The full-model results discussed above have shown that use
of the dedicated fulfillment (DTC) option is affected by order fulfillment, order
delivery, and warehousing costs. To explore these effects in further detail, results
were compiled for different levels of order fulfillment costs and warehouse oper-
ating costs (other factors were fixed at the base case levels). The consideration of
these two costs is relevant for this analysis as it helps retailers evaluate the useful-
ness of operating dedicated order fulfillment facilities over existing store-facing
DC facilities. Note that fulfillment cost levels are reported in two ways: absolute
cost values (dF ) as well as relative to DC fulfillment costs ( ddDF ).
The results (see Table 5) show that use of the DTC fulfillment option de-
pends greatly on warehousing and order fulfillment costs. DTC fulfillment was
the primary option (100% orders filled) for warehousing cost levels fF ≤ $10.00
and fulfillment cost level dF = $5.25. However, when DTCs operate at a higher
cost level fF ≥ $15.00, the differential in fulfillment costs between existing DCs
and new DTCs would favor the former. For example, DTCs filled only 25% of
total orders even when DTC unit order fulfillment cost (fF = $5.25) was 25% less
than the DC fulfillment option (i.e., ddDF = 0.75). None of the orders was processed
by DTCs when fulfillment cost differential between DTC and DC options was
reduced to 5%, that is, ddDF = 0.95 (see last row in Table 5).
Note that a lower dF level in Table 5 is related to a setting in which the
operational efficiency of DTC fulfillment centers is correspondingly higher than
a DC. For example, dF = $5.25 ( ddDF = 0.75) level represents the case where DTC
order fulfillment is 25% better than base-case DC fulfillment dD = $7.00 level. This
gain is achieved in a DTC fulfillment center by focusing resources and business
processes on the particular order profile of online orders, which is quite different
from store replenishment orders handled by DCs. The results in Table 5 show that
DTC remained the best fulfillment option until the marginal difference between
DTC and DC order fulfillment costs reached 85% ( ddDF = 0.85). At this setting (dF =
$5.95), 35% of online demand is filled from store-facing DCs, whereas all online
orders were filled by store-facing DCs for dF = $6.65. To justify the use of DTC
fulfillment, retailers have to consider a balance between order fulfillment efficiency
Table 6: Order delivery process.

Order Fulfillment Method
DTC DC STORE VENDOR
Discount Level ( ) (F) (D) (R) (V)
1.00 δD 100% − − −
0.95 δD 64% 36% − −
0.90 δD 64% 36% − −
0.85 δD − 100% − −
0.80 δD − 100% − −
Special cases:
δ√F = 0 δD √=0 =0
δR √ =0
δV √
√ 75% 4% − 21%
− − − − − 100% −
and facility operating costs. For example, to compensate for 50% higher DTC
operating costs (fF = $10.00 level vs. fF =$15.00 level), full utilization of DTC
fulfillment (100% orders) would require a DC order fulfillment cost deferential of
more than +30% (i.e., dF ≤$5.00; ddDF ≤ 0.70).
The choice of a fulfillment option not only depends on the efficiency of the
order fulfillment process, as discussed above, but also on the corresponding order
delivery process. We test how the order fulfillment choice may change if the retailer
negotiates a different order delivery rate. For this analysis, results are compiled
for different discount levels in the DC order delivery cost factors (see Table 6).
Each discount level reduces base delivery costs (1.00 δD ) by the corresponding
multiplier, for example, = 0.80δD corresponds to a 20% discount in DC order
delivery costs. The results show that the best fulfillment option changed from DTC
to DC fulfillment for = 0.95. At this point, the proportion of orders filled from
DTC reduced to 64%, with DCs filling the remainder (34%) of online orders. For
≤ 0.85, all orders were filled using DCs.
The delivery process for online orders depends on customers’ preferences.
In some cases, customers would pay delivery charges which would offset retailer’s
order delivery costs. In other cases, the retailer would incur these costs when
customer orders qualify for free shipping. In a related case, customers may opt to
pick their online orders from local stores to avoid the order delivery charges. A
case in which the retailer does not incur order delivery costs is represented by the
setting δF = δD = δR = δV = 0 (see Table 6). In this scenario, a large proportion
(75%) of online orders were filled from DTC fulfillment centers, and about 20%
of the orders were filled by vendors.
Another order delivery option considered in this study is the pick-from-
store arrangement in which last-mile delivery to customers’ homes is not needed.
Customers can pick up their orders from stores without paying any order delivery
charges. In this case the retailer would incur only shipping costs (costs may vary
depending on whether orders are shipped from DCs to stores separately or through
routine store deliveries). If the retailer fills orders from the local store inventory,
Ishfaq and Raja 21
there is no additional shipping/delivery cost for the retailer. The results for this
setting (see last row, Table 6) show a strong use of the store fulfillment option.
However, due to the higher cost structure of urban/suburban stores (real estate and
operational costs), the retailer’s fulfillment costs were significantly higher (43%)
than the base-case. We address store- and vendor-related issues in more detail in
later sections.
A related issue in order fulfillment is whether changes in online demand
may effect the retailer’s mix of fulfillment options. We conducted a post hoc test
to evaluate this effect by considering demand at different levels using multiplier
p = {1.0, 0.8, 0.6, 0.4, 0.2} to represent the proportion of online demand for
the retailer. Note that p = 1.0 represents demand in the base case. Because,
previous results had identified that order fulfillment and warehousing cost factors
affect fulfillment choices, we included these factors in the post hoc evaluation as
well.
The results (see Table 7) show that the DTC fulfillment option is greatly
affected by the level of online demand as it requires sufficient demand volume to
justify use of DTC facilities. For example, under the base-level demand scenario
for the (dF = $5.25, fF = $15.00) setting, 75% of online demand was filled using
the DTC option (the number in parenthesis identifies the number of DTCs used
for fulfillment). However, when demand falls below p= 0.6 level (40% less than
the base case demand), the DTC fulfillment option was no longer used. Below this
threshold, DC fulfillment was used to process all orders. It is interesting to note
that a very large reduction in demand (40%) would be needed to overcome the cost
advantage of the DTC option at dF = $5.25 level (which represents a 20% lower
unit fulfillment cost rate compared to the DC option).
The results also show that a shift from DTC to DC fulfillment occurred
step-wise depending on changes in the demand level. For example, in the case of
(dF = $5.95, fF = $5.00) under the base case demand setting, two DTC facilities
handled 100% of online orders. However, when demand level was set at p= 0.8
level (demand reduced by 20%), only one facility was used to fill 77% of demand
and the remaining online orders were filled by two DCs operated by the retailer.
The next shift in the mix of fulfillment options was recorded for levels below p=
0.4 (demand reduced by 60%) when the DTC facilities were closed and all orders
were filled by the retailer’s DCs.
Integrated (DC) Fulfillment: Impact of Order Fulfillment Costs

Using existing facilities to fill online orders allows for relatively lower total operat-
ing costs compared to adding new facilities. However, order fulfillment efficiency
for small size online orders is lower due to operating in an environment that is
built for the storage and handling of large pallet-loads for store replenishment.
However, in this option, retailers can reoptimize their DC locations for the entire
customer-base (in-store and online) and use established logistics routes for better
efficiency in the order delivery process. We expand this discussion by focusing on
the order fulfillment costs of the DC fulfillment option, in comparison with store
fulfillment. The corresponding results are compiled in Table 8 where columns rep-
resent the cost differential between DTC and DC options, as discussed previously,
22
Table 7: DTC-fulfillment: Effect of demand levels.

DTC Warehousing Costs
DTC Order Fulfillment Costs fF = $5.00 fF = $10.00 fF = $15.00

Demand Level
dF ( ddDF ) ( p) F D F D F D
$5.25 0.75 1.0 100% (2) − 100% (2) − 75% 25% (4)
(1)
0.8 100% (2) − 100% (2) − 75% 25% (4)
(1)
0.6 100% (1) − 100% (1) − 75% 25% (4)
(1)
0.4 100% (1) − 100% (1) − − 100% (6)
0.2 100% (1) − − 100% (6) − 100% (6)
$5.95 0.85 1.0 100% (2) − 65% (1) 35% (4) − 100% (6)
0.8 77% (1) 23% (2) 65% (1) 35% (4) − 100% (6)
0.6 77% (1) 23% (2) − 100% (6) − 100% (6)
0.4 77% (1) 23% (2) − 100% (6) − 100% (6)
0.2 − 100% (6) − 100% (6) − 100% (6)
$6.65 0.95 1.0 − 100% (6) − 100% (6) − 100% (6)
0.8 − 100% (6) − 100% (6) − 100% (6)
0.6 − 100% (6) − 100% (6) − 100% (6)
0.4 − 100% (6) − 100% (6) − 100% (6)
0.2 − 100% (6) − 100% (6) − 100% (6)
Evaluation of Order Fulfillment Options in Retail Supply Chains
Ishfaq and Raja 23
Table 8: DC-fulfillment: Effect of order fulfillment costs.
Order Fulfillment Costs (DTC)
d F = $5.25 d F = $5.95 d F = $6.65

( dd DF = 0.75) (dd DF = 0.85) (dd DF = 0.95)
F= 100% F= 65% F= – d R = $9.00
Order Fulfillment Costs (Store)

D= – D= 35% D= 100% (dd RD = 1.30)
R= – R= – R= –
F= 100% F= 65% F= – d R = $8.00
D= – D= 35% D= 100% ( dd RD = 1.15)
R= – – R= –
F= 100% F = 65% F= – d R = $7.00
D= – D = 35% D= 90% ( dd RD = 1.00)
R= – R= – R= 10%
F= 60% F= – F= – d R = $6.00
D= – D= – D= – ( dd RD = 0.85)
R= 40% R = 100% R= 100%
and rows represent the cost differential between store and DC options. Note that
both factor levels are normalized over the same (1.00 dD = $7.00) level.
The results in Table 8 show that for dR = $9.00 level, there is no use of the
store fulfillment option. It is interesting to note that the store fulfillment option
was selected only for the highest dF level (dF = $6.65 ). At this level, the store
fulfillment option was only used for the store order fulfillment cost dR = $7.00
level. In this case, 10% of the orders were filled from stores. A deeper review of
the results indicated that this situation was a result of orders that were filled from
stores located within USPS zones 1 and zone 2 of the retailer’s DCs, and thus were
marginally equivalent in logistics costs to fulfillment by DCs.
To further evaluate the shift from DC fulfillment to store fulfillment, we com-
piled results for an additional level of the order fulfillment cost factor: dR =$6.00
(see last row of Table 8). Note that we added this factor level for post hoc analysis
in this section only. The results show that the store fulfillment option becomes
the dominant option at this level, which corresponds to 15% reduction in store
fulfillment costs compared to the base case (i.e., ddRD = 0.85). This result reveals
that retailers would need to improve store fulfilment processes to reduce fulfillment
costs.
Store Fulfillment: Impact of Retail Inventory Allocation and Delivery

Costs
The proximity of stores to retailers’ customers provides a strong rationale for using
stores for order fulfillment. With low cost local last-mile order deliveries, no other
fulfillment option offers a more cost-efficient order delivery option. Furthermore,
selling store inventory online that would otherwise be marked down for clearance
in-store provides another rationale for use of store fulfillment. In addition to the
order fulfillment cost, there are two other factors affecting the store fulfillment
option: order delivery and retail inventory allocation for online orders. Typically,
retailers hold retail inventory to serve in-store customers, but some portion of this
inventory may be allocated for filling online orders.
To evaluate the effect of order delivery costs (δR ), retail inventory allocation
(κR ), and store fulfillment costs (dR ) on store fulfillment, results were compiled in
Table 9. The results show that store fulfillment is useful when the retailer’s order
delivery cost (δR ) is less than $3.65 for USPS zones 1 and 2 deliveries, and its
order fulfillment cost is around the dR = $8.00 level. At these levels, 9% of orders
were filled from stores. If the retailer can negotiate a lower unit order delivery rate
of δR = $2.75 for USPS zones 1 and 2 (a 40% discount from USPS published
rates), store fulfillment would increase significantly. The executives at the focal
retail firm confirmed that this level of shipping rate discount is negotiable with
package carriers, given the retailer’s current volume of online orders and projected
growth in the online sales channel.
The results show that low store inventory allocations (κR < 300) result in
fewer orders filled from stores. For example, in the case of dR = $7.00 and δR =
$2.75, 100% orders were filled by stores when κR ≥ 300. For inventory allocation
levels between 270 and 210, the proportion of store filled orders was reduced
from 95% to 75%. This result is important for retailers in establishing inventory
allocation targets if they want to utilize stores in their supply chain strategy. It is
also interesting to note that the use of retail stores was high for dR + δR ≤ $10.00.
This means that retailers can evaluate their order fulfillment and order delivery
costs collectively to set operational targets such that these costs (in total) are less
than the target threshold value ($10.00 for the case study data) when considering
the store fulfillment option.
Under the pick-from-store option, customers place orders online but are
willing to collect their orders from a local store to avoid order delivery charges.
In this setting, retailers do not incur order delivery costs (δR = $0.00). Note that
this case also applies to when customers pay for home delivery and the orders are
filled from the local stores, which would also result in δR = $0.00. The results of
the pick-from-store case are presented in the last column of Table 9. The results
show that the use of store fulfillment increased significantly under the pick-from-
store option (100% orders were filled from store), irrespective of the unit store
fulfillment cost level. A significant use of store fulfillment is seen even for the
base-case dR = $10.00, which confirms the $10.00 threshold for store fulfillment
discussed above. The only time the use of store fulfillment option reduced was
when store inventory allocation was restricted to a level less than the base-case.
Vendor Fulfillment: Impact of Fulfillment Fee and Order Delivery

Charges
From the standpoint of the order fulfillment process, vendor fulfillment is the most
economical option for retailers. There is no need to hold inventory or undertake
fulfillment operations. The online orders are transferred to vendors for direct
fulfillment and delivery. However, lack of wholesale discount and the burden of
order processing fees charged by vendors are major concerns for retailers’ operating
under slim gross margins. Additionally, the locations of vendor facilities may not
Ishfaq and Raja
Table 9: Store fulfillment: Inventory allocation and delivery costs.

Order Delivery Costs (Store)
δR = $4.55 δR = $3.65 δR = $2.75 δR = $0.00

(1.00)δR (0.80)δR (0.60)δR pick-from-store
Order Fulfillment Costs (Store) Store Inventory Allocation D R D R D R D R
dR = $9.00 κR = 270 100% − 100% − 100% − 5% 95%

( ddRD = 1.30) κR = 240 100% − 100% − 100% − 15% 85%
κR = 210 100% − 100% − 100% − 25% 75%
dR = $8.00 κR = 270 100% − 100% − 92% 8% 5% 95%
( ddRD = 1.15) κR = 240 100% − 100% − 92% 8% 15% 85%
κR = 210 100% − 100% − 93% 7% 25% 75%
dR = $7.00 κR = 270 100% − 92% 8% 5% 95% 5% 95%
( ddRD = 1.00) κR = 240 100% − 92% 8% 16% 84% 15% 85%
κR = 210 100% − 93% 7% 26% 75% 25% 75%
25
Table 10: Vendor fulfillment fee and delivery charges.
Delivery Costs (VENDOR)

dV = $8.50 dV = $6.80 dV = $5.10 dV = $3.42
(Base) (− 20%) (− 40%) (− 60%)
dV = $5.00 F = 100% F = 100% F = 100% F=−

Fulfillment fee (VENDOR)
( ddVD = 0.70) D=− D=− D=− D = 35%

V=− V=− V=− V = 65%
dV = $4.00 F = 100% F = 100% F = 82% F=−
( ddVD = 0.60) D=− D=− D=− D = 25%
V=− V=− V = 18% V = 75%
dV = $3.00 F = 100% F = 100% F=− F=−
( ddVD = 0.40) D=− D=− D = 26% D = 13%
V=− V=− V = 74% V = 87%
be optimized for a retailer’s customer base, forcing orders to be shipped over long
distances and incurring higher order delivery charges.
The results are compiled (see Table 10) for different levels of the order
fulfillment fee (dV ) charged by vendors to fill online orders, and order delivery
costs (δV ). The results show that the Vendor fulfillment option is useful for the
retailer when total fulfillment and delivery costs (dV + δV ) are less than $9.10 per
order. For order delivery costs of δV ≤$5.10, a significant use of Vendor fulfillment
was seen in the results. When the combined fulfillment fee and delivery costs were
set at $8.10 (dV = $3.00, δV =$5.10) per order, 74% of demand was filled by
vendors.
Retailers with sufficient shipment volume often negotiate significant dis-
counts on package delivery charges that can be as high as 60% (Stevens, 2016).
To test the effect of a lower order delivery cost level, we compiled results for an
additional factor level of vendor delivery costs (δV = $3.42, i.e., 60% discount
on base case rates), for post hoc analysis. At this lower delivery cost level, re-
sults show a higher use of Vendor fulfillment. For example, 87% of orders were
filled through vendor fulfillment for combined fulfillment and delivery costs of
dV + δV = $6.42. These results show that in order to achieve a high use of Vendor
fulfillment, retailers would need a lower fulfillment fee charged by the vendors
(around $3.00 per order) and to negotiate a significant discount on order delivery
charges with package carriers.
Comparative Cost Analysis

The analysis presented above provides detailed insights regarding cost thresholds
and the corresponding broad directional shifts in the use of different fulfillment
options. In this section, we use these insights to review the case of the focal firm and
consider different order fulfillment scenarios to compare with the retailer’s current
setting (base case). In this context, we compute detailed logistics and operational
costs to evaluate different fulfillment arrangements for the retailer.
Ishfaq and Raja 27
Table 11: Comparative cost analysis.

Base DTC Option Store Option1 Store Option2
{DC,V} {DC,V,DTC} {DC,V,R} {DC,V,R}
Fulfillment costs 870,400 628,425 624,935 1,226,141

Home delivery costs 552,157 588,103 478,899 −
Warehousing costs − 100,000 − −
Inventory costs 13,553 9,487 14,244 14,244
Shipping costs 57,815 55,061 98,724 98,724
Total costs: $1,493,925 $1,381,076 $1,216,802 $1,339,109
(−7.55%) (−18.55%) (−10.36%)
The focal firm in our study can leverage its existing store-facing distribution
operations to process online orders. Such an arrangement would require the retailer
to redesign its DC processes to handle two different types of orders (online orders
and store replenishment orders), resulting in suboptimal order fulfillment costs.
Table 11 presents operational and logistics costs computed for this scenario for
the focal firm (see column #2, referred to as the base case). We compare these
costs with the case of DTC fulfillment. A key operational benefit of using DTC
facilities focusing exclusively on processing online orders is lower order fulfillment
costs. However, operating additional facilities adds to total costs for the retailer.
To control such costs and to ensure economies-of-scale, retailers use sufficiently
large fulfillment centers. Results for the DTC fulfillment option (see column #3)
show that while warehousing and order delivery costs were higher for the retailer,
potential savings in fulfillment costs made it a better (lower cost) option. Overall,
total costs for DTC fulfillment were lower (−7.5%) for the retailer as compared to
the base case.
Next, we explored the use of store fulfillment for the focal firm. In evaluating
this option, we noted that current levels of fulfillment costs at the firm do not
justify the use of stores. Hence, even when {R} was included in the {DC, V,
DTC} scenario in Table 11, stores were not used for order fulfillment. To further
explore the use of store fulfillment, we evaluated two additional scenarios. In store
option 1, we used the insights as discussed earlier (i.e., dR + δR ≤ $10.00) and set
the unit store fulfillment cost at $5.00 per order and local delivery rate at $4.00 per
order. The results (see column #4) show this setting is favorable for using stores
for order fulfillment. Under this option, shipping and inventory costs were quite
high for the retailer. However, lower last-mile delivery costs provided a significant
cost differential from the base case resulting in a major reduction (−18.55%) in
total costs for the retailer.
A related setting in store fulfillment is that retailer’s online customers pick
their orders from local store (known as BOPIS—Buy Online Pick In Store). In this
setting, retailer’s order delivery costs would be further reduced. We considered this
option as a special case of the previous scenario where all online orders will be
picked up by customers in local stores. The purpose of this setting is to evaluate
the effect of a higher store fulfillment cost rate that reflects the current challenge
for retailers to execute store fulfillment at requisite low costs. For this scenario,
dR =$10.00 was used to represent a fulfillment cost rate which is double that of
the previous scenario. The results confirm (see column #5) high fulfillment costs
for the retailer, however, this option still costs the retailer less than the current DC
fulfillment option (−10.36%) due to savings in order delivery costs. While it is
unrealistic to assume that all online orders will be picked up from local stores,
this scenario demonstrates that last-mile delivery cost is a significant expense
in order fulfillment. It also highlights the benefit of the BOPIS arrangement for
retailers in using store fulfillment even when the fulfillment cost rate at stores
remains high.
In light of the analysis above, we note that retailers’ choices of order ful-
fillment options depend greatly on the underlying operational and logistics costs.
Under prevalent conditions, the focal firm in our study can see cost reductions by
using DTC fulfillment, even when the expense of operating additional facilities is
included. A bigger cost advantage is possible when retailers use their stores for
order fulfillment, mainly due to the reduction in last-mile delivery costs. We note
that these results reflect cost benefits for the retailer, however, managing separate
and independent fulfillment options in the physical and virtual channels would
increase administrative overheads. Retailers would need to consider this aspect
while evaluating their specific circumstances. We also note that realizing requisite
low store fulfillment cost rates will be challenging for retailers that struggle with
store execution in the physical channel. In such cases, retailers may be better off
not complicating store operations and employ the DTC fulfillment option.
DISCUSSION
Implications for Research and Practice
As retailers seek to employ suitable order fulfillment options to manage online
orders, the difference in operational requirements between filling online orders and
managing store replenishment orders presents a major challenge. This challenge
arises when retailers try to integrate the online order fulfillment process within
their existing store-based distribution processes. For order fulfillment, store-based
retailers have four options available: existing store-facing DCs, retail stores, new
direct-to-customer fulfillment centers, and fulfillment through vendors. The results
of this study show that economies-of-scale inherent in large-size distribution and
fulfillment centers provide a strong rationale for use of such facilities over store
and vendor fulfillment methods.
Using the warehousing cost measure, our study revealed the additional ex-
pense of operating direct-to-customer facilities must be offset by improvements
in order fulfillment efficiency compared to DC fulfillment. Under the current lo-
gistics cost structure of the focal retailer, our study found that proposed DTCs
offer a marginal advantage over DC fulfillment. Our results also show that DTC
fulfillment is not a good option if its relative operational benefit in unit order ful-
fillment costs is less than 15% of DC fulfillment costs. Hence, retailers looking
to use direct-to-customer fulfillment facilities need to employ logistics processes
that provide sufficient operational cost differential compared to retailers’ existing
DCs. Otherwise, retailers are better off using existing store-facing DCs for filling
online orders.
Ishfaq and Raja 29
An important outcome of our study is that retailers can assess the benefit of
facility improvements (such as installing automated material handling equipment,
and acquiring new technology for order picking and employee training), and ensure
such an investment provides requisite operational efficiency gains that result in
lower order fulfillment costs. For example, our results show that the use of DTC
did not change, even with 50% higher warehousing costs/investments, if such
an increase would help the retailer reduce the order fulfillment costs by 30%
or more.
Our article shows that retailers’ order delivery costs directly impact their
order fulfillment choice in that negotiating lower delivery rates alters the use-
fulness of order fulfillment options. For example, a 15% discount in package
delivery charges resulted in a major shift toward order fulfillment through ex-
isting DCs for the focal firm in our study. This finding offers retailers the op-
tion to avoid major capital investments required for new fulfillment facilities
(DTCs), and instead leverage existing distribution facilities (DC) to fill online
orders.
The high cost of last-mile order delivery has been a major concern for store-
based retailers. To lower this expense, retailers have considered using their retail
stores to fill online orders. Our results have shown store fulfillment can be a viable
option for retailers with competitive order fulfillment costs. The analysis, based
on economic estimates of the labor wages of sales associates employed in retail
stores and order delivery charges for the last mile, shows that retailers need to keep
the combined order fulfillment and delivery charges under $10 per order. Given
relatively high wage rates for sales associates in retail stores as compared to DC
employees, the best opportunity for retailers to achieve this goal is to reduce order
delivery charges for local (USPS zones 1 and 2) order deliveries. For example,
a 40% rate reduction compared to the undiscounted USPS parcel shipping rates
used in this study significantly increased the use of store fulfillment over DC
fulfillment.
While a higher wage rate of store employees is a concern in store fulfillment,
there are other aspects that would compensate for this downside. In consultations
for this research, retailers identified that a major motivation for store fulfillment
is the ability to sell items online at full price that are otherwise slated for price
markdown or clearance. In this setting, the consideration of lost revenue due to a
price markdown would offset the higher order fulfillment cost in stores.
In a store retail setting, many retailers leverage their relationship with vendors
engaged in the retailers’ store business. By hosting the products of these vendors
on the retailers’ Web sites, customers are offered access to a much broader product
assortment online than what is stocked in stores. This setting is beneficial for
a retailer in attracting more customers to its brand. The retailer pays an order
processing fee to the vendor to fill online orders and contracts out order deliveries
to package carriers to ship orders to customers directly from vendor facilities. Our
analysis has shown that the current order processing fee structure used by vendors
does not offer a profitable option for retailers. We observed in the study that the
threshold for the order processing fee and delivery costs for the vendor fulfillment
option is around $9.10. At this cost point, vendor fulfillment was used for 18%
of all online orders. Further reductions in the order processing fee and delivery
costs led to a much higher use of this option. Our results show that nearly 75%
use of vendor fulfillment is possible when order processing and delivery costs are
about $8.10 per order. The results also show that retailers are better off negotiating
a lower order delivery rate than attempting to reduce the order processing fee
charged by vendors, as the former would have a higher marginal impact on the use
of the vendor fulfillment option.
Limitations and Research Extensions

As with any research, there are some limitations of this study. One such limitation
stems from the use of a single focal firm. However, we note that order fulfillment
and order delivery data used in the study are generalizable because similar order
fulfillment processes are used by other store retailers in terms of the process
structure and organization—though retailers differ in operational execution and
process efficiency. We have considered such differences in our study through
the use of factorial experiment research design. The use of multiple factor levels
provides sufficient variation in field data and test scenarios to cover aforementioned
operational differences.
Another limitation exists due to the use of a static distribution network.
Retailers routinely expand their network of stores and distribution facilities to
adjust to market realities. These changes may affect the choice of fulfillment
options (e.g., opening additional stores to enter a new market may result in product
flows that make store fulfillment more economical). Additionally, the effect of
customers perception of retailers order fulfillment performance (fulfillment delays,
excess shipping charges, and lack of order tracking) on future demand needs
consideration.
The empirical data used in this study did not include heavy and bulky items,
thus our analysis did not directly capture the effect of size/weight of items on
fulfillment and delivery costs. Furthermore, we did not consider the complexity
and managerial overhead of employing multiple order fulfillment options. Though
unavailability of empirical data to validate the corresponding modeling construct
did not allow us to consider this issue in the study, operational complexity is an
important topic for future research.
Given the complexity inherent in retail supply chains, there are many op-
portunities to extend our study. One such extension is through focusing on the
profitability of different order fulfillment options, instead of logistics costs. A con-
cern raised by retail supply chain executives is that the current practice is to fill
online demand at all costs to avoid losing market share. This approach, at times,
results in low and often negative profitability for retailers. This extension would
focus on identifying cases where retailers are better off ignoring some proportion
of online demand if it would yield subpar profits due to high order fulfillment
costs. This suggested extension would also address the point discussed earlier re-
garding price markdowns of store inventory—a consideration that may increase
the usefulness of store fulfillment for retailers.
The complexity inherent in the order delivery process offers opportunities
for additional investigations. This complexity stems from customers’ choices of
delivery options for their orders. The difficulty in implementing this consideration
Ishfaq and Raja 31
is that the same customer may decide to have the order delivered to their home
by paying the shipping costs in one order and select the pick-from-store option
for another order which incurs no last-mile order delivery cost for the retailer.
An operational-level study can address the case of multiple items per order where
pooling benefits can be realized by shipping multiple items together in the same
box. However, issues related to split shipment of orders due to multiple fulfillment
locations would need to be considered in this case. This setting requires complex
product flow and inventory placement decisions in addition to deciding the mix of
order fulfillment options.
CONCLUSIONS
This research presented a detailed framework of the order fulfillment process in the
retail supply chain. This framework considers multiple fulfillment options avail-
able to store-based retailers that include existing network of stores and distribution
(DC) facilities, new direct-to-customer (DTC) fulfillment centers, and collaborat-
ing with vendors to fill online orders directly from vendor facilities. In an empirical
study, these fulfillment options were evaluated to provide managerial insights re-
garding each fulfillment option and identify operational and cost thresholds where
a particular fulfillment option would be preferred.
Using data from a large U.S. retailer and a factorial design approach, this
study found that large distribution facilities (DCs and DTCs) provide economies-
of-scale more suitable for order fulfillment compared to other options. However,
retailers would need to carefully consider the corresponding increase in operating
costs in their DC/DTC networks. The study identified an efficiency threshold,
reflected by the 10% differential in order fulfillment costs, for the DTC option
to justify operating dedicated facilities to fill online orders. Conversely, retail
firms that can operate DTC facilities with low operating costs would not need to
achieve a prohibitively high order fulfillment efficiency goal to justify the use of
DTC facilities. The study also indicated that the usefulness of an order fulfillment
option depends greatly on the corresponding order delivery process. For example,
in our study, a 15% discount in order delivery charges allowed the retailer to use
existing DCs and avoid the need to operate dedicated (DTC) fulfillment facilities.
This study finds that stores are costly order fulfillment nodes for retailers
compared to the distribution facilities. Retailers would need to improve store ful-
filment (through improved store processes and better training of store associates)
to bring the combined fulfillment and order delivery costs under $10.00 per order.
Above this threshold, store fulfillment is not a very competitive option compared
to DCs and DTCs. The results have also highlighted that it is important for re-
tailers to allow sufficient store inventory for online orders to maximize use of
store fulfillment, especially for the pick-from-store delivery option. The study also
found that a lower order processing/fulfillment fee, charged by vendors, would
be needed (reduced to around $3.00 per order) to make vendor fulfillment a cost-
competitive fulfillment option for retailers. Another approach that would favor
vendor fulfillment is to negotiate discounted delivery rates with package carriers
so that retailers’ total cost per order is below the $6.40 threshold.
Overall, this study presented a detailed analysis of different settings for the
order fulfillment and order delivery process and demonstrated how changes in the
underlying cost structure can impact the usefulness of one fulfillment option over
another. The study concluded that the scale economies achieved in DC and DTC
fulfillment facilities outperform the store and vendor fulfillment options. However,
with some changes in the order fulfillment and delivery processes, retailers can
leverage their stores more effectively for order fulfillment.
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Rafay Ishfaq is the HCoB Endowed Research Fellow and associate professor
of supply chain management in the Raymond J. Harbert College of Business at
Auburn University. He received his PhD degree in operations management from
The University of Alabama. Combining mathematical modeling and field stud-
ies, his research addresses issues related to strategic planning of operations and
efficient use of resources. His research work in supply chain management, informa-
tion systems, health care, and energy is published in scholarly journals including
IIE Transactions, European Journal of Operational Research, OMEGA, Supply
Chain Quarterly, International Journal of Physical Distribution and Logistics
Management, Journal of Operational Research Society, Computers and OR, and
International Journal of Logistics Management. His research has been recognized
by the Association of European Operational Research Societies with the Best
Ishfaq and Raja 35
EJOR Research Paper Award. His research has also appeared in Science Direct’s
Top-25 Hottest Articles list in multiple years.
Uzma Raja is a professor of management information systems in the Culverhouse

College of Commerce at The University of Alabama. She received her PhD in
management information system from Mays Business School at Texas A&M Uni-
versity. Her primary expertise is in the application of business analytics tools and
techniques using exploratory research methods. Her research has been published in
journals such as IEEE Transactions on Software Engineering, Empirical Software
Engineering, Journal of Software Maintenance, Information and Technology Man-
agement, and IIE Transactions. She is an active member of the AIS community
and the special interest group on business analytics.

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Decision Sciences © 2017 Decision Sciences Institute

Evaluation of Order Fulfillment Options

Subject Areas: Order fulfillment, Retail supply chain, and E-commerce.

processes has resulted in the emergence of a retail distribution strategy in which

Figure 1: Order fulfillment paths in a retail supply chain.

uncertain seasonal variations of demand in the online channel. Another approach

channels and allocates it to different DCs based on DC-to-store and DC-to-

RETAIL DISTRIBUTION SYSTEM

Figure 2: Order fulfillment framework.

is represented by ptkm . The retailer purchases products from vendors (j ∈ V) for

and the mathematical representation of the retail distribution system described

πtkm = Demand of product k in market m in period t,

Xetk ≥ 0, Units of k shipped through e ∈ EI ∪ EO in t,

Order Fulfillment and Delivery Processes

to 1,300,000 sq-ft with an average storage-space utilization factor of 0.93. As an

Table 2: Factorial study design.

Factors Base Case Parameter L1 L2 L3

RESULTS AND ANALYSIS

The parameters of the FMlogit model are obtained using a quasi-maximum

Table 3: Summary statistics of response variables.

Mean .802 .766 .268 .352

Table 4: Average marginal effects estimated by fractional multinomial logit.

DTC[p] DC[p] R[p] V[p]

of respective fulfillment options. The objective of this detailed analysis (discussed

Table 5: DTC-fulfillment: Order fulfillment and warehouse operating costs.

DTC Order Fulfillment Costs fF = $5.00 fF = $10.00 fF = $15.00

$5.25 0.75 100% − 100% − 75% 25%

Dedicated (DTC) Fulfillment: Impact of Order Delivery, Order

Table 6: Order delivery process.

DTC DC STORE VENDOR

Discount Level ( ) (F) (D) (R) (V)

Integrated (DC) Fulfillment: Impact of Order Fulfillment Costs

Table 7: DTC-fulfillment: Effect of demand levels.

DTC Order Fulfillment Costs fF = $5.00 fF = $10.00 fF = $15.00

Table 8: DC-fulfillment: Effect of order fulfillment costs.

Order Fulfillment Costs (DTC)

d F = $5.25 d F = $5.95 d F = $6.65

F= 100% F= 65% F= – d R = $9.00

Order Fulfillment Costs (Store)

Store Fulfillment: Impact of Retail Inventory Allocation and Delivery

Vendor Fulfillment: Impact of Fulfillment Fee and Order Delivery

Table 9: Store fulfillment: Inventory allocation and delivery costs.

δR = $4.55 δR = $3.65 δR = $2.75 δR = $0.00

Order Fulfillment Costs (Store) Store Inventory Allocation D R D R D R D R

dR = $9.00 κR = 270 100% − 100% − 100% − 5% 95%

Table 10: Vendor fulfillment fee and delivery charges.

Delivery Costs (VENDOR)

dV = $5.00 F = 100% F = 100% F = 100% F=−

( ddVD = 0.70) D=− D=− D=− D = 35%

Comparative Cost Analysis

Table 11: Comparative cost analysis.

Fulfillment costs 870,400 628,425 624,935 1,226,141

Limitations and Research Extensions

de Koster, R. (2002). Distribution structures for food home shopping. Interna-

Ramalho, E. A., Ramalho, J. JS., & Murteira, J. (2011). Alternative estimating

Uzma Raja is a professor of management information systems in the Culverhouse

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