Distribution Strategies that Minimize Transportation and Inventory Costs

Abstract

This paper develops an analytic method for minimizing the cost of distributing freight by truck from a supplier to many customers. It derives formulas for transportation and inventory costs, and determines the optimal trade-off between these costs. The paper analyzes and compares two distribution strategies: direct shipping (i.e., shipping separate loads to each customer) and peddling (i.e., dispatching trucks that deliver items to more than one customer per load). The cost trade-off in each strategy depends on shipment size. Our results indicate that, for direct shipping, the optimal shipment size is given by the economic order quantity (EOQ) model, while for peddling, the optimal shipment size is a full truck. The peddling cost trade-off also depends on the number of customers included on a peddling route. This trade-off is evaluated analytically and graphically. The focus of this paper is on an analytic approach to solving distribution problems. Explicit formulas are obtained in terms of a few easily measurable parameters. These formulas require the spatial density of customers, rather than the precise locations of every customer. This approach simplifies distribution problems substantially while providing sufficient accuracy for practical applications. It allows cost trade-offs to be evaluated quickly using a hand calculator, avoiding the need for computer algorithms and mathematical programming techniques. It also facilitates sensitivity analyses that indicate how parameter value changes affect costs and operating strategies.

The Importance of Systems for Controlling Logistics Costs in the Supply Chain: A Case Study from the Slovenian Automotive Industry

“…A decomposition method was presented to solve problems with few origins and shipment sizes. A similar study was published by Burns et al [25], which explored the problem of reducing the total costs of inventory and transport from each supplier to a larger number of customers using the structure of the Economic order quantity (EOQ) model. They derived formulas for the inventory and transport costs and determined the optimal trade-off between these costs.…”

Carbon Reduction Investments under Direct Shipment Strategy

“…An example scenario is developed based on the data used in Burns et al (1985) with additional assumptions on carbon costs. …”

“…We consider a distribution system that operates under the direct shipment strategy as described in Burns et al (1985). In Section 2, we extend the model proposed by Burns et al (1985) to include a decision on carbon reduction investment as well as carbon costs. Section 3 provides some analytical results and managerial implications, and the conclusion is followed in Section 4.…”

Optimal Distribution-Inventory Planning of Industrial Gases. II. MINLP Models and Algorithms for Stochastic Cases

“…location-routing problem 39 and strategic transportationinventory problem. 40 In this problem, tank sizing decisions are strategic decisions made on a yearly basis. Thus, a continuous approximation model can be used to simplify the detailed routing problem, while still capturing the trade-off between capital costs and routing costs at the strategic level.…”