A stochastic model for joint inventory and outbound shipment decisions

Abstract

In this paper, we consider a vendor realizing a sequence of random order arrivals in random sizes. The vendor has the autonomy to hold/consolidate small orders until an economical dispatch quantity accumulates. Consequently, the actual inventory requirements at the vendor are in part determined by the parameters of the shipment release policy in use. In this context, we investigate the impact of shipment consolidation on the expected long-run average cost by simultaneously computing the optimal order quantity for inventory replenishment at the vendor and the optimal dispatch quantity for outbound shipments. Since we consider the case where demand follows a general stochastic bulk arrival process, obtaining exact analytical expressions for some key operating characteristics of the cost function is intractable. Hence, we provide easy-to-compute approximations which enable efficient numerical solutions for the problem. We also investigate: (i) the cases where consolidated shipments are preferred over immediate deliveries; (ii) the sensitivity of optimal integrated policy variables to demand/cost parameters; (iii) the potential savings that can be obtained by shipment consolidation; and (iv) the tradeoffs between the waiting time induced by shipment consolidation and costs saved. Our results provide insights into the impact of outbound transportation operations on inventory replenishment decisions and outbound distribution system design. Moreover, numerical testing suggests that significant cost savings (up to 57%) are possible with shipment consolidation.