Optimal fulfillment and replenishment for omnichannel retailers with standard shipping contracts

E-commerce sales rise exponentially and represent an increasing proportion of global retail. To benefit from this, traditional brick-and-mortar stores enter the e-commerce market and become omnichannel retailers. However, the profitability of omnichannel retailers remains questionable due to high shipment and fulfillment costs. This paper addresses this challenge, focusing on using standard shipping contracts as a potential solution. Such contracts promise delivery within a given number of periods. Once a customer orders, the retailer should set a delivery period. In this way, retailers are flexible in setting exact delivery days, providing an opportunity for jointly optimizing product replenishment and customer fulfillment. We provide a generic model for the use of standard shipping contracts and formulate it as a Markov decision process. We provide optimal solutions using a modified policy iteration algorithm. Our results show that using standard shipping contracts creates a win-win situation: It increases profits and customer service. The observed profit increase is directly linked to maintaining less on-hand inventory. This effect is more pronounced for higher valued products and longer replenishment lead times. Additionally, we propose a heuristic policy that performs within 4% of the optimal policy.