Analyzing trade-offs between transportation, inventory and production costs on freight networks

• Published in: Transportation research. Part B: methodological 1985-01, Vol.19 (5), p.361-380
• Main Authors: Blumenfeld, Dennis E., Burns, Lawrence D., Diltz, J.David, Daganzo, Carlos F.
• Format: Article
• Language: English
• Subjects: Applied sciences; Exact sciences and technology; Ground, air and sea transportation, marine construction; Transportation planning, management and economics
• ISSN: 0191-2615; 1879-2367
• DOI: 10.1016/0191-2615(85)90051-7

The purpose of this paper is to determine optimal shipping strategies (i.e. routes and shipment sizes) on freight networks by analyzing trade-offs between transportation, inventory, and production set-up costs. Networks involving direct shipping, shipping via a consolidation terminal, and a combination of terminal and direct shipping are considered. This paper makes three main contributions. First, an understanding is provided of the interface between transportation and production set-up costs, and of how these costs both affect inventory. Second, conditions are identified that indicate when networks involving direct shipments between many origins and destinations can be analyzed on a link-by-link basis. Finally, a simple optimization method is developed that simultaneously determines optimal routes and shipment sizes for networks with a consolidation terminal and concave cost functions. This method decomposes the network into separate sub-networks, and determines the optimum analytically without the need for mathematical programming techniques.