Strategic Network Design for Delivery by Drones under Service-based Competition

In today’s world, E-commerce is a fast growing industry and e-retailers are looking for innovative ways to deliver customer orders within short delivery times at a low cost. Currently, the use of drone technology for last-mile delivery is being developed by such companies as Amazon, FedEx, and UPS. Drones are relatively cheaper and faster than trucks but are limited in range and may be restricted in landing and takeoff. Most of the work in the Operations Research literature focusses on the operational challenges of integrating drones with truck delivery. The more strategic questions of whether it is economically feasible to use drones and the effects on distribution network design are rarely addressed. These questions are the focus of this work. We consider an e-retailer offering multiple same day services using both existing vehicles and drones, and develop a facility location problem under service-based competition where the services offered by the e-retailer not only compete with the stores (convenience, grocery, etc.), but also with each other. The competition in the market is incorporated using the Multinomial Logit (MNL) market share model. To solve the resulting nonlinear mathematical formulation we develop a novel logic-based Benders decomposition approach. We also show that the nonlinear model can be transformed into a linear mixed integer formulation. Computational experiments show that our algorithm outperforms direct solution of the linear formulation. We carry out extensive numerical testing of the model and perform sensitivity analyses over pricing, delivery time, government regulations, technological limitations, customer behavior, and market size. The results show that government regulations play a vital role in determining the future of drone delivery