An application of interdependent lot size and consolidation point choice

The efficiency of consolidation points in a distribution system is driven both by the total volume transported and by the lot size in which the product travels. We examine a finished goods distribution system for a major automobile manufacturer that is setting policy concurrently for consolidation points and for the lot size of transport. Through simulation of the distribution system we show the impacts of consolidation on product holding time, volume volatility and customer service. Our results show a significant reduction in total system inventory from consolidation; however, some customers’ service is adversely affected. We then develop a methodology for determining the best combination of consolidation, direct shipment and lot size for all origins and destinations in the distribution system in order to minimize inventory holding time while simplifying operations and maintaining customer service. Preliminary results are shown which demonstrate the potential for substantial reductions in the total finished vehicle holding time in the system.