Omnichannel Distribution to Fulfill Retail Orders

Problem definition: Although the analytical literature has extensively studied distribution channels, the empirical evidence on the values 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 to 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 tradeoffs between different order fulfillment measures and costs in different distribution channels. Methodology: I exploit two switches in distribution channels of a manufacturing company to their retail customers: one from single-DC to dual-DC distribution, and the other from single-DC to factory-direct distribution. To account for the tradeoffs 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, 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 to 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, while 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