Shipping Consolidation with Delivery Deadline and Expedited Shipment Options

Abstract

Problem definition: Shipment consolidation is commonly used to take advantage of the economies of scale by avoiding some of the shipping costs. However, when pending current orders are consolidated with future orders it may require more expensive expedited shipment in order to meet shorter deadlines. In this paper, we study the optimal consolidation policy focusing on the trade-off between economies of scale and expedited shipping costs. Academic/Practical Relevance: Our work is motivated by the prevalence of consolidation in the supply chain industry and also by its potential application for online and omni-channel retailing, especially with the rise of, so-called, on-demand logistic services. In such situations, sellers, have the flexibility to take advantage of consolidation, by deciding from which warehouse to fulfill the orders and also when to ship the orders, as long as the orders deadlines are met. Methodology: We use Dynamic Programming to study the optimal policy and its structure. We also conduct intensive simulation tests to show the good performance of heuristics which we proposed based on structures of the optimal policy. Results: The optimal policies and their structures are characterized in settings with up to two warehouses, where the impact of expedited shipment on both shipping policy and order fulfillment policy are explored. Utilizing the insights of these structural properties, two easily implementable heuristics are proposed, which perform within 1-2% of the optimal in intensive numerical tests. Managerial Implications: Despite the complexity of the actual optimal consolidation policy, sellers can apply the two simple heuristic policies we proposed to get near-optimal performance in various cases.