Handling operations and the lot size trade-off

Abstract

This paper presents a handling cost model for a warehouse that supplies one or more stores with a large number of items and examines operating strategies whose objective is to minimize the sum of handling, transportation and inventory costs. Decisions must be made regarding the frequency of shipments to the store(s) (i.e. the transportation schedule) and the specific items and lot sizes included in each shipment. The paper shows that, conditional on a transportation schedule, lot sizes for the different items (i.e. their delivery frequency consistent with the transportation schedule) can be determined separately across items and independently for each store. The paper also examines how these lot sizes and the best transportation schedule can be identified. The results, unlike those of other inventory models such as the economic order quantity (EOQ) model, exhibit peculiarities caused by the nonsmooth nature of handling costs. For example, the optimal lot size for individual items sent to a specific store is not a continuous function of the value or size of the items. This suggests the need for practical routing and inventory control procedures that recognize handling explicitly.