Fatih Mutlu. On the cost and service performances of shipment consolidation policies

Abstract. In order to benefit the economies of scale of transportation, the suppliers prefer consolidating the small size orders at the expense of customer waiting cost. The logistics literature reports that two different types of such policies are popular in current practice. These are i) time-based and ii) quantity-based consolidation policies. While the time-based consolidation policy guarantees timely deliveries, the quantity-based policy assures the economies of scale. On the other hand, the consolidation policies    which utilizes the time- and quantity- dimensions are also of particular interest. For example a time-and-quantity policy tries to consolidate a certain load before satisfying the orders, but if it takes more than a threshold time to consolidate the desired load, the orders are satisfied before exceeding that time.

We develop analytical models for i) computing the long run average of the expected costs, ii) computing selected service measures, and  iii) comparing the cost and service performances for the three types of policies described above.  We show that, under our modeling assumptions, quantity-based policies are cost-wise superior to the other policies. We also demonstrate that time-and-quantity policies combine the cost benefits of quantity-based policies and the service benefits of time-based policies.