Optimization of ship-pack in a two-echelon distribution system

Abstract

The traditional Economic Order Quantity (EOQ) model ignores the physical limitations of distribution practices. Very often distribution centers (DC) have to deliver merchandise in manufacturer-specified packages, which can impose restrictions on the application of the economic order quantity. These manufacturer-specified packages, or ship-packs, include cases (e.g., cartons containing 24 or 48 units), inners (packages of 6 or 8 units) and eaches (individual units). For each Stock Keeping Unit (SKU), a retailer decides which of these ship-pack options to use when replenishing its retail stores. Working with a major US retailer, we have developed a cost model to help determine the optimum warehouse ship-pack. Besides recommending the most economical ship-pack, the model is also capable of identifying candidates for warehouse dual-slotting, i.e., two picking modules for the same SKU that carry two different pack sizes. We find that SKUs whose sales volumes vary greatly over time will benefit more from dual-slotting. Finally, we extend our model to investigate the ideal case configuration for a particular SKU, that is, the ideal size for an inner package.