E-fulfillment and multi-channel distribution – A review

Abstract

This review addresses supply chain management issues specific to Internet fulfillment in a multi-channel environment. It provides a systematic overview of managerial planning tasks and corresponding quantitative models. Our objective is to twofold, namely to enhance the understanding of multi-channel e-fulfillment by documenting the current state of affairs, and to inspire fruitful future research by identifying gaps between relevant managerial issues and available academic literature.

One of the recurrent patterns in today’s e-commerce operations is the combination of ‘bricks-and-clicks’ – the integration of e-fulfillment into a portfolio of multiple alternative distribution channels. From a supply chain management perspective, multi-channel distribution provides opportunities for serving different customer segments, creating synergies, and exploiting economies of scale. However, in order to successfully exploit these opportunities companies must master novel challenges. In particular, the design of a multi-channel distribution system requires a constant trade-off between process integration and separation across multiple channels. In addition, sales and operation decisions are ever more tightly intertwined as delivery and after-sales services are becoming key components of the product offering.

Introduction

Despite the end of the initial hype, Internet sales have seen tremendous growth rates over the past years (Forrester Research, 2005). While the retail market share of Internet sales is still small its quarterly growth rate of 8.6% in 2004 largely outweighs the corresponding 1.3% growth of total retail sales (Dinlersoz and Hernandez-Murillo, 2005). After the initial over-enthusiasm, more sustainable models of e-commerce have started to emerge. One recurrent pattern is the combination of ‘bricks-and-clicks’, the integration of online sales into a portfolio of multiple alternative distribution channels. In 2003, multi-channel retailers accounted for 75% of the online sales in the United States (Forrester Research, 2005). This development is fed from two sides. On the one side, many traditional retailers have added an online channel to their portfolio. On the other side, ‘pure-play’ Internet retailers are opening physical stores or are collaborating with traditional retailers, as in the case of Internet pure-player iParty.com that opened 33 physical stores in the USA (Campanelli, 2001). Hence, understanding the interplay between multiple channels is essential for understanding Internet fulfillment. While online sales and multi-channeling provide rich opportunities, the design of the underlying distribution processes also confronts companies with novel complexities. To the best of our knowledge, no review article has yet addressed the specific supply chain management issues of Internet fulfillment in a multi-channel environment. This paper attempts to fill this gap by providing a systematic overview of the relevant issues and linking them to available operational research models. Our objective is to twofold, namely to enhance the understanding of multi-channel e-fulfillment by documenting the current state of affairs, and to inspire fruitful future research by identifying gaps between relevant managerial issues and available academic literature.

Before reviewing specific planning issues, we include a few additional comments on multi-channeling to set the stage. Opportunities and challenges of a multi-channel strategy concern both marketing and operations management. Furthermore, decisions in both fields are ever more tightly intertwined.

From a marketing perspective, different channels differ in their abilities to perform various service outputs. The Internet channel is particularly powerful in providing information to the customer, thereby reducing the buyer’s search costs. Another advantage of the Internet channel is the ability to provide a very large range of products. Much of the value of the internet to consumers comes from providing access to products in the long tail (Brynjolfsson et al., 2003). On the other hand, an advantage of the traditional channel is the proximity to customers – that customers can buy a book and receive it instantly. Offering multiple complementary channels provides a greater and deeper mix of customer service, thereby enhancing the seller’s overall value proposition (Wallace et al., 2004). Channel preferences vary between customers. But even individual customers are increasingly becoming multi-channel shoppers, preferring different channels at different moments and at different stages of the shopping process (Nunes and Cespedes, 2003). On the downside, major marketing-related concerns in multi-channeling include cannibalization and channel conflicts (Webb, 2002). An additional distribution channel may partly cannibalize the sales of existing channels, rather than growing total sales. Conflicts may arise between different divisions that manage a company’s different channels, but even more so between different supply chain members, for example a manufacturer competing with its own resellers through a customer-direct Internet channel (Tsay et al., 2004). Consequently, managing the overall portfolio, rather than individual channels is key in multi-channeling.

From an operations management perspective, multi-channeling may yield synergies that help reduce e-fulfillment costs. E-fulfillment, delivering physical goods to the customer, is commonly cited as one of the most expensive and critical operations of Internet sellers (de Koster, 2002a, Lummus and Vokurka, 2002). Economies of scale from the integration of multiple channels need to be weighed against specific requirements of each individual channel. In particular, the economics of customer-direct Internet channels tend to differ from those of other channels due to small, single-order transaction sizes (Currah, 2002). Thus, companies need to make trade-offs when deciding which processes to integrate across channels and which processes to separate (Gulati and Garino, 2000).

The aforementioned marketing and operations management aspects are increasingly interrelated. Many markets have seen a shift from customers buying stand-alone physical products to customers seeking ‘total solutions’, i.e. a bundle of a physical product and related services. Services include, e.g., maintenance, consumable supplies, and end-of-life recovery. In an online channel, delivery is a key service element. Furthermore, just as mass customization has made the consumer a ‘co-maker’ of the physical product, companies are now tailoring their service processes to individual customers’ needs. This means that customers are gaining significant impact on company processes, and it underlines the importance of coordinating marketing promises and operations capabilities.

In the remainder of this paper we highlight the different planning tasks that arise in this setting. We proceed as follows. Section 2 delineates the exact scope of the paper and provides a framework that structures our discussion. Sections 3 Sales and delivery planning, 4 Supply management form the core of this paper. They discuss supply- and delivery-related e-fulfillment issues, respectively. Each section first discusses managerial planning issues observed in practice and then reviews corresponding operational research models. Section 5 summarizes our conclusions.