Periodic review inventory management with contingent use of two freight modes with fixed costs

Jain, A and Groenevelt, H and Rudi, N (2011) Periodic review inventory management with contingent use of two freight modes with fixed costs. Naval Research Logistics, 58 (4). pp. 400-409.

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We study a stochastic inventory model of a firm that periodically orders a product from a make-to-order manufacturer. Orders can be shipped by a combination of two freight modes that differ in lead-times and costs, although orders are not allowed to cross. Placing an order as well as each use of each freight mode has a fixed and a quantity proportional cost. The decision of how to allocate units between the two freight modes utilizes information about demand during the completion of manufacturing. We derive the optimal freight mode allocation policy, and show that the optimal policy for placing orders is not an (s,S) policy in general. We provide tight bounds for the optimal policy that can be calculated by solving single period problems. Our analysis enables insights into the structure of the optimal policy specifying the conditions under which it simplifies to an (s,S) policy. We characterize the best (s,S) policy for our model, and through extensive numerical investigation show that its performance is comparable with the optimal policy in most cases. Our numerical study also sheds light on the benefits of the dual freight model over the single freight models.

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ISB Creators
Jain, A
Item Type: Article
Uncontrolled Keywords: policy; inventory/production: periodic review; lead-times; transportation economies of scale; transportation: freight mode selection
Subjects: Operations Management
Depositing User: Users 7 not found.
Date Deposited: 13 Nov 2014 07:59
Last Modified: 13 Nov 2014 08:05
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