During the current economic times, companies are trying to reduce costs by incorporating
new strategies into their business plan. Supply chain, in particular the distribution
network is one area where an improvement can bring in a healthy return on investment to
a company. Drop-shipping is a distribution strategy whereby customer orders are fulfilled
by directly delivering products from manufacturer‟s facility, instead of storing these
products at the warehouse. Drop-shipping helps in reducing inventory and material
handling costs at the warehouse, but may increase transportation costs due to frequent
shipments. This research was motivated by the current operations at a promotional
products distributor in the Midwest US. This distributor wanted to decide which products
to drop-ship versus stock in the warehouse. We develop a mixed integer programming
(MIP) model to categorize the products as „to be drop-shipped‟ or „kept in warehouse‟
with the objective of minimizing the total distribution cost. This single-period MIP model
assumes deterministic demand, all-unit transportation LTL and parcel rates, and
warehouse space. To solve larger problem instances, a Ruin and Recreate (RR) based
heuristic is proposed. Numerical results indicate that a savings in warehouse space
ranging between 28-53% and an additional cost savings of up to 5.2%. A case study
involving realistic data obtained from the distributor is presented and avenues for future
research in this area are discussed.
During the current economic times, companies are trying to reduce costs by incorporatingnew strategies into their business plan. Supply chain, in particular the distributionnetwork is one area where an improvement can bring in a healthy return on investment toa company. Drop-shipping is a distribution strategy whereby customer orders are fulfilledby directly delivering products from manufacturer‟s facility, instead of storing theseproducts at the warehouse. Drop-shipping helps in reducing inventory and materialhandling costs at the warehouse, but may increase transportation costs due to frequentshipments. This research was motivated by the current operations at a promotionalproducts distributor in the Midwest US. This distributor wanted to decide which productsto drop-ship versus stock in the warehouse. We develop a mixed integer programming(MIP) model to categorize the products as „to be drop-shipped‟ or „kept in warehouse‟with the objective of minimizing the total distribution cost. This single-period MIP modelassumes deterministic demand, all-unit transportation LTL and parcel rates, andwarehouse space. To solve larger problem instances, a Ruin and Recreate (RR) basedheuristic is proposed. Numerical results indicate that a savings in warehouse spaceranging between 28-53% and an additional cost savings of up to 5.2%. A case studyinvolving realistic data obtained from the distributor is presented and avenues for futureresearch in this area are discussed.
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