An analysis of mode choice for shippers in a constrained network with applications to just-in-time inventory

The process of choosing a mode of transport for the distribution of materials by a shipper is analyzed in terms of setup, inventory, and order costs as well as the usual cost of hauling. Capacity and requirements constraints are also considered. The procedure is further extended to include transshipment warehouses and concave transport costs. The problem is formulated as a nonlinear program and local optimal solutions are found for each problem using GINO, a generalized reduced gradient algorithm. The nonlinear programs are also solved using a decomposition procedure. It is found that the choice of mode has implications for shipping patterns throughout the network. In particular, adoption of special shipping strategies, such as the just-in-time (JIT) inventory policy, depend on the comparative total costs for each link in the network. When the shipping strategy is JIT, the cost of production at the demand point must also be considered. It is suggested that total cost of shipping, storage, and production be the decision criterion wherever shipping options are available and that costs for an entire network be considered when transport decisions are made.