Analyzing Inventory/Transportation Cost Tradeoffs for Milkrun Parts Delivery Systems to Large JIT Assembly Plants

As one considers the interrelationship between supplier logistics and performance of JIT assembly plants, the question arises concerning how many hours of parts inventory are appropriate. Low inventories reduce holding costs, throughput times, and (by eliminating storage) material handling costs internal to the plant. Moreover, under the lean philosophy, low inventories enable improved control over part quality and supplier performance and they maintain a healthy stress on the system necessary to motivate improvements. The dollar magnitude of these later savings is intangible but generally considered significant. On the other hand, low inventories also increase the frequency of milkrun routes and the number of suppliers on these routes, hence, increasing transportation costs. Using an optimization model for milkrun route design that may be parameterized by inventory level, empirical studies suggest that, in general, transportation costs at first increase only gradually as inventory levels are reduced and then begin to rise exponentially as a lower bound is approached. Based on this characteristic of the inventory/transportation cost relationship, a procedure is established for estimating the number of hours of inventory for a given plant that appropriately reconciles the tradeoff between transportation and internal costs associated with inventory level.