- Inventory
- Network Design
- Transportation
With the fast growth of e-commerce, online shoppers are becoming accustomed to free and fast delivery. Small and medium-sized businesses are experiencing rising transportation costs as they are having to switch from slower methods of shipping to fast delivery options (e.g., next day or two-day) to cater to customer demand. Our sponsoring company is a 3PL providing services for these types of businesses and is currently operating five fulfillment centers. They are looking to propose a two-day delivery service to their e- commerce customers. To do that, the company requires an optimization model that recommends the location and the number of fulfillment centers to activate for a given client to meet demand within a two- day window and with a high on-time performance, while minimizing the total logistic cost. The model also balances the tradeoff between inventory and transportation cost. In this capstone project we elaborate such an optimization model and apply it to two customers with different shipping profiles. The results show that the outbound transportation was identified as the most significant portion of the overall logistics spend. This was especially true when the item being shipped was dense causing a higher rate per shipment. Inbound and inventory cost became more significant with low-velocity items and regions with low demand. By opening five fulfillment centers, Customer 1 would save 8.4% and by opening four fulfillment centers, Customer 2 would save 36.1%. A 3PL can use this model to balance the inventory savings realized by a centralized network with the transportation costs savings achieved by a decentralized configuration.