How Order Routing Algorithms Improve Fulfillment Efficiency

Retailers all over the world are facing the same raw reality: today’s customers demand more than just a product—they expect lightning-fast delivery, often within hours. But how do companies ensure that orders get to the right place, at the right time, and at the lowest cost?  There is no hidden secret. As it happens with many other industries, the solution lies in leveraging the right technology. 

In this blog, we will delve into order routing algorithms—intelligent systems designed to streamline fulfillment by analyzing real-time data to make the best decision. These algorithms transformed fulfillment efficiency from geographic proximity and inventory levels to delivery speeds and cost considerations. 

Ready to dive into how they work and why they’re critical for the future of fulfillment? Let’s explore!

What Are Order Routing Algorithms?

Order routing algorithms are computational methods used in supply chain and fulfillment operations to assign customer orders to the most efficient fulfillment location automatically. These algorithms ensure that each order is processed and shipped from the optimal location, improving fulfillment efficiency, reducing costs, and enhancing customer satisfaction.

Once an order is placed, the algorithm evaluates several factors in real time and uses predefined rules to assign it to the warehouse, shop, or fulfillment center that can process and deliver the order most efficiently. This process happens automatically, ensuring quick decision-making without manual intervention.

Key Variables Considered

1. Geographic proximity: Orders may be routed to the fulfillment location closest to the delivery destination, minimizing shipping time and costs.
2. Inventory availability: The algorithm ensures the selected site has the items in stock to meet the order requirements.
3. Fulfillment capacity: Orders can be distributed based on the workload and capacity of different distribution locations, ensuring that no single site is overwhelmed.
4. Shipping costs: By calculating and comparing shipping options, the algorithm can route orders to the venue that will result in the lowest shipping costs.
5. Delivery speed: For time-sensitive deliveries, the algorithm can prioritize fulfillment centers that meet expedited shipping requirements.
6. Customer preferences: Special instructions or preferences, such as eco-friendly shipping options or same-day delivery, can also influence routing decisions.

Example

A customer orders a pair of Steve Madden boots, available in multiple warehouses, Steve Madden boutiques, and even a few department stores like Macy’s and Nordstrom. The order routing algorithm evaluates the inventory levels at each location, compares their distance to the customer, and considers current warehouse workloads. 

Based on this analysis, the algorithm routes the order to the closest location with available stock and sufficient capacity to handle the order quickly and efficiently. The order is then processed and shipped from the selected location, ensuring timely delivery at the lowest possible cost.

The Role of Algorithms in Reducing Shipping Times

In a world where two-thirds of online shoppers expect to receive their items within 24 hours and 40% expect delivery within two hours, shipping times matter a lot. As we’ve said before, order routing algorithms play a pivotal role in reducing shipping times by intelligently assigning orders to fulfillment locations that can deliver products most quickly to customers. But how does this happen?

Here's how they optimize shipping:

1. Real-Time Inventory Visibility: The algorithm first verifies which sites have the required products in stock. Then, it routes orders to the closest location with available inventory to ensure the shortest possible transit time.
2. Geolocation and Proximity: Orders are prioritized to ship from the center nearest to the customer, reducing the package's travel time and enabling same-day or next-day delivery.
3. Shipping Method and Capacity: For orders requiring expedited delivery, such as two-hour shipping, the algorithm factors in the capacity to meet that deadline. Locations with lower workloads or specialized fast-shipping capabilities are chosen to ensure timely fulfillment.
4. Dynamic Adjustments: These algorithms can respond to real-time changes, such as traffic conditions, delays at a distribution center, or spikes in demand. They reroute orders to other sites if needed, maintaining speed and fulfillment efficiency.

Fast delivery enhances customer satisfaction and sales in many ways:

• Loyalty: Routing algorithms ensure that businesses consistently meet fast and timely delivery expectations, maintaining a loyal customer base.
• Competitive Advantage: Offering faster shipping times gives companies a leg up on competitors. Customers are more likely to choose a brand that promises rapid delivery over one that offers standard shipping times.
• Reduced Cart Abandonment: Lengthy shipping times are a common reason for cart abandonment. By reducing delivery windows, businesses can increase conversion rates and overall sales.
• Improved Operational Efficiency: Faster fulfillment not only benefits customers, it also streamlines internal operations. By utilizing real-time data, businesses can optimize their warehouse capacity, reducing bottlenecks and delays.

Case Studies and Industry Examples

Amazon Prime

Amazon’s advanced order routing algorithms are behind its same-day and two-hour Prime delivery options. The system analyzes inventory, customer location, and warehouse availability to ensure products are shipped from the closest fulfillment center. This allows Amazon to consistently meet its fast-shipping promises, helping it dominate customer satisfaction.

Walmart

Walmart has invested heavily in its order management and routing systems, enabling next-day delivery for millions of items. Their algorithms route orders to local stores or distribution centers, minimizing the distance between fulfillment locations and customers, leading to faster deliveries.

Wellness Retailer Case Study

A wellness brand that aimed to optimize its fulfillment process switched to Deck Commerce's order management system (OMS). By leveraging geolocation in their order routing algorithm, they routed orders to the nearest of their two distribution centers, with 70% of orders going to their higher-capacity center. This change helped them increase their fulfillment capacity from 1,000 to 10,000 orders per day, slashing shipping times and drastically improving customer satisfaction.

Read the full case study here → Natural Wellness Company Uses Deck Commerce to Increase E-commerce Fulfillment Capacity by 900%

Optimizing Inventory Management with Order Routing Algorithms

Order routing algorithms enhance many stages of the order lifecycle. As we’ve seen, they can speed up shipping. They can also optimize inventory management across multiple fulfillment locations. By dynamically adjusting inventory levels based on real-time data, these algorithms ensure that businesses maintain balanced stock levels, avoiding the pitfalls of overstocking and understocking.

Balancing Inventory Across Multiple Locations

Order routing algorithms continuously analyze inventory levels across various fulfillment locations, allowing businesses to distribute products strategically. Here's how they work:

1. Real-Time Inventory Monitoring: Algorithms track stock levels in real-time across all locations, enabling dynamic adjustments. For example, if one warehouse runs low on a particular product, the algorithm may redirect incoming orders to another warehouse with higher stock levels. This helps maintain optimal inventory distribution.
2. Stock Level Predictions: Algorithms forecast demand patterns using historical data and predictive analytics. This allows businesses to proactively move inventory to locations where demand is expected to increase, preventing stockouts in high-demand areas while keeping excess stock from accumulating in lower-demand regions.
3. Intelligent Replenishment: When certain products run low, algorithms trigger automatic replenishment from suppliers or other warehouses. The system ensures that inventory is restocked in the right locations at the right time, preventing overstock in one site while another runs dry.
4. Seasonal Adjustments: During peak seasons, such as holidays or special promotions, order routing algorithms can shift inventory between locations to accommodate surges in demand. This helps avoid the need for emergency shipments or last-minute stock transfers.

Avoiding Overstocking and Understocking

One of the key benefits of inventory routing algorithms is their ability to avoid both overstocking and understocking. Here's how:

1. Preventing Overstocking: Overstocking ties up capital in excess inventory and increases storage costs. By continually evaluating demand and inventory levels, algorithms distribute products more evenly, preventing any single warehouse from becoming overburdened with unnecessary stock.
2. Reducing Understocking: Understocking can lead to stockouts, resulting in missed sales opportunities and unhappy customers. Routing algorithms ensure that stock is available where it's needed, mitigating the risk of understocking through constant updates and redistribution.
3. Dynamic Redistribution: In cases where demand shifts unexpectedly, such as during regional sales or flash promotions, algorithms can quickly reroute products from one warehouse to another to ensure that no area experiences a shortage, maintaining business continuity.

Cost Savings from Optimized Inventory Distribution

Better inventory management through order routing algorithms leads to significant cost savings:

1. Lower Storage Costs: With optimal inventory distribution, businesses avoid the cost of maintaining large volumes of excess stock. Efficient use of warehouse space reduces storage fees and minimizes the need for extra warehousing capacity.
2. Reduced Emergency Shipping: When inventory is properly distributed, businesses can avoid costly emergency shipments to cover unexpected demand or stockouts. Emergency shipping—often expedited at higher costs—becomes less necessary as the algorithm ensures stock is available closer to the point of demand.
3. Minimized Wastage: Overstocking can lead to product obsolescence, particularly with perishable goods or items with expiration dates. By maintaining balanced stock levels, algorithms help minimize waste, leading to cost savings in unsellable or expired goods.
4. Improved Cash Flow: By avoiding overstocking and understocking, businesses can keep inventory levels lean and efficient, freeing up cash flow that would otherwise be tied up in unsold products.

Lowering Costs With Fulfillment Efficiency

Besides minimizing warehouse transfers and avoiding expedited shipments, order routing algorithms help reduce several other types of operational costs:

1. Lowering Returns: By improving order accuracy and selecting the most appropriate fulfillment centers, routing algorithms help minimize the number of incorrect or delayed orders, which reduces the likelihood of returns. Fewer returns translate into lower reverse logistics costs and fewer lost sales.
2. Lower Cost Per Order: By choosing the most cost-effective fulfillment center and shipping route for each order, businesses can lower their overall cost per order, resulting in higher margins on each sale.
3. Improved Resource Allocation: With algorithms automating order distribution and shipping decisions, businesses can allocate their resources more efficiently. Less time is spent manually coordinating shipments or managing errors, allowing staff to focus on other revenue-generating activities.
4. Enhanced Customer Satisfaction: By optimizing the complete order fulfillment system, businesses can deliver faster and more accurately, leading to fewer customer complaints, returns, and chargebacks. Happier customers tend to become repeat buyers, increasing long-term profitability.

Enhancing Scalability in Fulfillment

Routing algorithms improve fulfillment efficiency in so many ways that they open possibilities for expansion. They give businesses the flexibility to grow sustainably, scaling operations while keeping costs in check and customer expectations high. Reducing reliance on manual processes allows companies to handle more orders without significant operational strain.

Handling Increasing Order Volumes

As we’ve seen, an order routing algorithm can help a lot when orders surge, especially during peak seasons or promotions. They can automatically distribute workloads across fulfillment locations. This ensures efficient processing, reduces bottlenecks, and maintains service speed without needing extra staff.

Adapting to Demand Fluctuations

Algorithms dynamically respond to fluctuations in demand, routing orders to fulfillment locations with available capacity. This ensures smooth operations during high-demand periods, minimizing delays.

Supporting a Growing Customer Base

As companies expand, order routing algorithms keep fulfillment optimized, ensuring efficient delivery for a more extensive customer base. This scalability maintains service quality, even with increasing demand, fostering customer loyalty.

Reducing Human Error and Improving Accuracy

Manual order processing is prone to incorrect shipments, delays, and inefficient fulfillment. By automating these decisions, order routing algorithms significantly reduce human error. Algorithms can quickly process real-time data on inventory levels, customer locations, and warehouse capacity to ensure orders are routed accurately and efficiently.

Fewer errors lead to more accurate fulfillment, resulting in fewer returns and better customer experiences. In turn, this improves customer loyalty, as customers receive the right products faster, with fewer issues, reinforcing trust in the brand.

Integrating with Other Supply Chain Technologies

Order routing algorithms don’t operate in isolation. They seamlessly integrate with other supply chain tools like warehouse management systems (WMS), inventory management software, and predictive analytics platforms. This integration allows for real-time data exchange across the entire supply chain, optimizing decision-making and fulfillment processes.

Artificial intelligence (AI) and machine learning play key roles in refining these algorithms. Over time, AI improves the accuracy of order routing decisions by learning from past data and continuously enhancing fulfillment efficiency based on evolving demand patterns and customer behaviors.

Evolve or Expire

In an era where customer expectations are shifting faster than ever, the advantages of advanced order routing algorithms are undeniable—quicker shipping, lower costs, greater scalability, and fewer mistakes. As competition heats up, businesses that don’t evolve risk falling behind.

Order routing technology isn’t just a nice-to-have; it’s a key driver of efficiency, enabling companies to handle rising order volumes, meet delivery demands, and keep customers happy. To stay ahead, businesses must adapt now.

Are you ready to evolve?

Additional Resources

If you want to continue digging into fulfillment solutions, check out these resources.

1. Curious on how you can leverage order routing algorithms for your business? Explore Deck Commerce’s OMS and its order routing capabilities.
2. Learn more about Choosing the Right Order Management System for Omnichannel Retail
3. Worried about the environmental consequences of fulfillment? Check out Sustainable Fulfillment: How to Reduce Your Carbon Footprint
4. Want to hear about retail on the go? Join us on Covering Commerce—where we sit down with top ecommerce and direct-to-consumer experts to talk everything retail.

If you want to explore how order routing algorithms can transform your fulfillment operations, our team of experts is here to help. We can provide tailored solutions to boost efficiency and customer satisfaction within the complexities of your retail company. 

Contact us today and get a demo.