On the use of dark stores in omnichannel last-mile distribution

Mariana Batista da Costa

Key information

Authors:

Mariana Batista da Costa (Mariana Batista da Costa)

Supervisors:

Susana Isabel Carvalho Relvas (Susana Isabel Carvalho Relvas)

Published in

11/30/2022

Abstract

Retailers need to adapt their operations to follow the evolution of e-commerce. Additionally, customers rising expectations for fast deliveries and shopping experience underline the need for improvement in order fulfillment. Omnichannel is a potential solution that by integrating online and offline channels reduces friction for customers. However, it is challenging to implement by retailers. In this work, we investigate the use of dark stores as a potential fulfillment node to support online demand in an omnichannel retail network. This research studies the performance of three channel designs: SFSW - ship from store and warehouse; SFDSW - ship from dark store and warehouse; and SFSDSW - ship from store, dark store and warehouse. The fulfillment problem is formulated as a profit maximizing mixed integer linear programming (MILP). Warehouses and dark stores’ locations can be decided through the model solution, whereas stores are given as retailer assets that can be maintained or closed. Product flows between all echelons are also determined. The demand is treated in an endogenous and elastic manner, as a function of distance and levels of competition in online and store markets. Three different product categories are separately treated in the model: electronics, fashion and food. Results evaluate the operational efficiency and profitability of different network configurations, showing that the SFSW and SFSDSW generate greater profit than the SFDSW. The electronics category is the most profitable of all. Dark stores do not leverage profit as the traditional facilities do, however, there is space for optimization and growth.