Estimating the effects of carrier transit-time performance on logistics cost and service

Joint determination of an appropriate transportation mode and an optimal inventory control policy is important in supply chain management. We present a method of estimating the effects of carrier transit-time performance on logistics cost and service. Unlike current approaches, this method enables users to develop accurate estimates when non-normal shapes characterize the probability distributions of both demand and lead time. Additionally, the methodology includes two important refinements to the standard transportation-inventory model. First, we relaxed the assumption that the shipping cost is a linear function of the order quantity. Second, we treated transit time as a segment of lead time. We used the gamma distribution to illustrate the flexibility of the method and developed an enhanced sensitivity-analysis tool for examining the effects of carrier transit time on both cost and service. The methodology is appropriate for the transportation of service-sensitive, independent-demand inventory items controlled by a continuous review inventory system.