Omnichannel Distribution to Fulfill Retail Orders

Abstract

Problem definition: Although the analytical literature extensively studies distribution channels, empirical evidence on the value of omnichannel distribution is limited, especially for the omnichannel used by manufacturing companies to fulfill retail orders. I empirically evaluate the extent to which the dual–distribution center (dual-DC) distribution channel and the factory-direct distribution channel contribute to fulfilling orders from retail stores compared with the traditional single–distribution center (single-DC) channel. Academic/practical relevance: Many manufacturing companies develop their distribution omnichannel to fulfill retail orders. To make proper decisions on various channels, they need to understand the trade-offs between different order-fulfillment measures and costs in different distribution channels. Methodology: I exploit two switches in distribution channels of a manufacturing company to its retail customers: one from single-DC to dual-DC distribution and the other from single-DC to factory-direct distribution. To account for the trade-offs between order fulfillment and the costs associated with each distribution channel, I develop three equations for fill rate, lead time, and production and distribution costs in a difference-in-difference framework and then estimate the equations using proprietary data of retail orders and delivery records. Results: The results quantify the contributions of distribution channels to order fulfillment. Compared with the single-DC distribution channel, the dual-DC distribution channel raises the fill rate by 0.4% and reduces the lead time by 9.7% without incurring additional costs, whereas the factory-direct distribution channel increases the fill rate by 0.5% and provides a 5.2% cost savings but extends the lead time by 12.5%. I further analyze these contributions to order fulfillment across demand variability and order quantity. Managerial implications: The findings provide manufacturing companies with valuable knowledge of their distribution channel choices and means to find a cost-effective distribution channel to improve order fulfillment for various customers and products.