Drop-Shipping at a Promotional Products Distributor

During the current economic times, companies are trying to reduce costs by incorporating new strategies into their business plan. Supply chain, in particular the distribution network is one area where an improvement can bring in a healthy return on investment to a company. Drop-shipping is a distribution strategy whereby customer orders are fulfilled by directly delivering products from manufacturer\u27s facility, instead of storing these products at the warehouse. Drop-shipping helps in reducing inventory and material handling costs at the warehouse, but may increase transportation costs due to frequent shipments. This research was motivated by the current operations at a promotional products distributor in the Midwest US. This distributor wanted to decide which products to drop-ship versus stock in the warehouse. We develop a mixed integer programming (MIP) model to categorize the products as \u27to be drop-shipped\u27 or \u27kept in warehouse\u27 with the objective of minimizing the total distribution cost. This single-period MIP model assumes deterministic demand, all-unit transportation LTL and parcel rates, and warehouse space. To solve larger problem instances, a Ruin and Recreate (RR) based heuristic is proposed. Numerical results indicate that a savings in warehouse space ranging between 28-53% and an additional cost savings of up to 5.2%. A case study involving realistic data obtained from the distributor is presented and avenues for future research in this area are discussed