Cost Effectiveness of Postponed Routing Decisions in a Supply Chain

Abstract

This paper examines the cost-reduction effect of “postponed” routing decisions in a two-echelon supply chain. When a delivery vehicle leaves the warehouse with system replenishment quantities, it sequentially makes routing decisions to choose the next retailer to visit. To measure this effect this paper studies combined vehicle routing and inventoryallocation policies designed to minimize total expected purchasing, inventory-holding and backordering cost/period for a one-warehouse Nretailer “symmetric” distribution system. Using a numerical study, we demonstrate that optimal dynamic routing and allocation policies can significantly reduce the inventory-management costs associated with fixed routing and dynamic allocation in “medium-to-large” customer demand-variance scenarios.