TRADE-OFF BETWEEN FREIGHT EXPEDITING AND SAFETY STOCK INVENTORY COSTS

Abstract

This paper develops an analytical model for evaluating the trade-off between transportation and inventory costs when shipping freight between a supplier and manufacturing plant under uncertainty. This uncertainty can result from deviations from forecasted material demand, travel time variability or the failure of suppliers to meet their production schedules. Equations are developed for the inventory costs associated with safety stock, and the transportation costs associated with regular and expedited shipments. The optimal trade-off between these costs is derived, and its sensitivity to model parameters is evaluated. This paper shows that a small safety stock can reduce freight expediting costs substantially by reducing the likelihood of stocking-out. Despite the desirability of keeping small levels of inventory in just-in-time production, it is generally desirable to hold some safety stock. The need for excessive inventory can be reduced with various just-in-time techniques, but inventory should not be eliminated entirely. (Author)

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