Performance Analysis of Order Fulfillment for Low Demand Items in E-tailing

Abstract

We study inventory allocation and order fulfillment policies among warehouses for low-demand SKUs at an online retailer. A large e-tailer strategically stocks inventory for SKUs with low demand. The motivations are to provide a wide range of selections and faster customer fulfillment service. We assume the e-tailer has the technological capability to manage and control the inventory globally: all warehouses act as one to serve the global demand simultaneously. The e-tailer will utilize its entire inventory, regardless of location, to serve demand. Thus, given the global demand and an order fulfillment policy, there are trade-offs involving inventory holding costs, transshipment costs, and backordering costs in determining the optimal system inventory level and allocation of inventory to warehouses. For the case of Poisson demand and constant lead time, we develop methods to approximate the key system performance metrics like transshipment, backorders and average system inventory. We then use these results to develop guidelines for inventory stocking and order fulfillment policies for online retailers.