Improved delivery policies for future drone-based delivery systems

Abstract

It is expected that commercial use of drones in the near future will involve delivery service operations by e-commerce companies. We consider relevant strategic and tactical decisions that these retailers will face in drone-based delivery operations, and derive policies on when to offer drone delivery, what delivery capacity to maintain, and what amount to charge for such deliveries. To this end, we develop a Markov decision process (MDP) framework, and introduce two heuristic procedures, through which near-optimal closed-form solutions can be obtained. The results are aimed at helping online retailers to determine in real time whether and to what extent to offer drone-based delivery for given product categories in different service zones. In addition, we study delivery fee structures and identify drone-based delivery pricing strategies under two widely used delivery pricing schemes. For capacity planning decisions, we describe an algorithm to identify the fleet size to utilize to fulfill uncertain demand in a given service region. We also identify structural characteristics on how these decisions and the expected profit are affected by changes in various problem parameters, which can generate generic insights on drone-based delivery operations for e-commerce companies. We find that retailers should prioritize more profitable items when allocating drone delivery capacity, and invest in adding more drones when per order opportunity costs are higher and promised delivery time thresholds are shorter. Retailers can potentially boost their net profits by increasing the effective promised delivery time threshold and/or decreasing the effective delivery delay costs and per order opportunity costs.