Transportation contracts and safety stocks for just-in-time deliveries

Just-in-time manufacturing operations often establish transportation contracts to ensure the timely delivery of inbound freight. If the usage of parts is constant and known, it is easy to decide on the characteristics of the transportation contract taking into account costs and other practical considerations. If the usage of parts is not perfectly predictable, however, the transportation contract and safety stock levels must be established in view of the potential costs of emergency shipments (premium freight) and shortages. The authors address the problem of simultaneously determining characteristics of a transportation contract and safety stocks to support just-in-time operations at minimum cost at the interface between an assembly facility and a single high-volume supplier from which it receives direct shipments. Heuristic procedures are developed, and some general conclusions are drawn from numerical examples for a prototypical demand process.