Michael Watson Ph.D
Oct 9th, 2013

Determining the best delivery frequency for suppliers into your facilities involves trading-off three key factors:

First, you need to to consider transportation costs.  If your vendors ship frequently, you end up paying more in transportation per unit.   What makes this analysis complex is that transportation rates are not linear.   As you move from Truckload (TL) shipments to the Less-Than-Truckload (LTL)market your costs per unit rise quickly.  And, with truckloads, you need to also consider the capacity of the truck.

Second, you need to consider the inventory costs.   If your vendors ship frequently, then you have less inventory.   You have less cycle stock because each order needs to cover a smaller amount of demand.  And, safety stock is lower because if you experience higher than expected demand, you can quickly get another order to make up the difference.  Of course, with less frequently deliveries, cycle and safety stock will both increase.

Third, you need to consider your vendor quantity discounts.  If your vendor gives you a quantity you need to decide if it is worth it to order more than you want to get the quantity discount.

What makes this interesting is that the relationship between these factors changes over time.  As oil price increases, the transportation costs are more important.  As interest rates rise or your products have shorter life cycles, inventory costs become more important.