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 the use of standard shipping contracts as a potential solution. Such contracts promise delivery within a given amount 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 leads to a win-win situation: it lowers total cost and increases customer service. The observed cost reduction is directly linked to maintaining less on-hand inventory. This effect is more pronounced for higher valued products and longer replenishment lead times.