Shipping Consolidation Across Two Warehouses with Delivery Deadline and Expedited Options for E-commerce and Omni-channel Retailers

Problem definition: Shipment consolidation (i.e., shipping multiple orders together instead of shipping them separately) is commonly used to decrease total shipping costs. However, when the delivery of some orders is delayed, so they can be consolidated with future orders, a more expensive expedited shipment may be needed to meet shorter deadlines. In this paper, we study the optimal consolidation policy focusing on the trade-off between economies of scale due to combining orders and expedited shipping costs, in the setting of two warehouses. Academic/practical relevance: Our work is motivated by the application of fulfillment consolidation in e-commerce and omni-channel retail, especially with the rise of so-called on-demand logistics services. Sellers have the flexibility to take advantage of consolidation by deciding when to ship the orders and from which warehouse to fulfill the orders, as long as the orders’ deadlines are met. Methodology: We use Dynamic Programming to study the optimal policy and its structure. We also conduct extensive simulation tests to evaluate the performance of heuristics that are based on structures of the optimal policies. Results: The optimal policies and their structures are characterized. Using the insights of these structural properties, we propose two easily implementable heuristics that perform within 1%–2% of the optimal solution and outperform other benchmark consolidation methods in numerical tests. Managerial implications: Consolidation is shown to significantly reduce the outbound shipping costs. Retailers can take advantage of it to effectively improve the standard policies by simply applying the threshold-form heuristics we propose.