Dive Brief:

• Order delivery and fulfillment costs have the biggest combined impact on the profitability of a retailer's online order fulfillment strategy, according to a paper published earlier this year in the European Journal of Operational Research titled "Profitability of online order fulfillment in multi-channel retailing."
• The analysis concluded that fulfillment from distribution centers or direct-to-consumer fulfillment centers tended to have the highest level of profitability, while store-based fulfillment had the highest fulfillment-related costs due to comparatively high wages for store employees.
• Fulfillment from a store accounted for more than 46% of overall logistics spending, compared to the 34% and almost 30% observed for distribution centers and DTCs, respectively. The researchers found in-store fulfillment could be a competitive option but only if retailers were able to cut fulfillment costs by 40% through greater efficiency. Despite the upfront costs, the report said "the resulting increase in sales and profits would more than compensate for such efforts."

Dive Insight:

Deciding which fulfillment option is the best is not just about cost; it's also about profitability — which Rafay Ishfaq, a professor at Auburn University's Department of Systems and Technology, and Naeem Bajwa​, a professor at University of Arkansas College of Business, took into consideration when developing the model used in their paper.

"If the underlying product pricing, costs of goods, and logistics costs for a certain proportion of demand would not allow the retailer to fill these online orders in a profitable manner, [the] model would not recommend serving such demand," the paper reads.

Researchers derived the results of fulfillment costs by applying a model they developed based on data from an anonymous retailer that was the focus of the study. Profitability for that retailer ended up being very close for DTC and distribution centers at 17.5% operating profit and 17.4%, respectively.

"This level of profitability is difficult to match when filling orders through retail stores and vendor networks, under current cost levels," the paper concluded.

The reason fulfillment costs were higher for the store-based fulfillment method was due to higher wage rates for urban and suburban employees at retail locations. This resulted in fulfillment costs that were over 30% higher than fulfilling the online order from a distribution center.

Fulfillment costs were lowest for firms using vendors to directly fulfill orders, but the inability to buy in bulk resulted in higher costs for the actual goods. Delivery fees were similarly high for this fulfillment method.

Every option comes with tradeoffs. While store-based fulfillment had a lower operating profit (14.7%) and high fulfillment cost, it had the lowest delivery cost because store locations tended to be closer to customers' homes than distribution centers, DTCs or vendor locations. If a retailer is able to cut delivery cost or fulfillment costs by a certain amount, then it could make sense to use this method for up to a third of orders, the paper found.

Some retailers have built fulfillment networks where even more of their online orders are delivered from store locations. Target is one example of a retailer using this method. It fulfills 80% of online orders through its stores.

Earlier this year, Ishfaq told Supply Chain Dive store-based fulfillment can help with speed as more retailers promise faster shipping times. But most of the retailers considering this method are larger brands with a large network of stores, he said.

Figuring out what is profitable will vary depending on the given retailer. A recent study on the buy-online-pickup-in-store (BOPIS) model found the profitability of this process relies on how the seller sets its retail price and the radius in which it allows shoppers to use BOPIS.

These variables and fulfillment mixes won't be the same for every retailer. However, these studies highlight how changes to fulfillment and operations models can have an impact on the profitability of a company's overall e-commerce strategy.