Distributors are frequently faced with the dilemma of whether they should force an inventory replenishment order up to a full truck load in order to achieve a better shipping rate. In some cases the freight charge is a flat dollar amount regardless if the truck is filled or not. In this case a partially filled truck will create a greater freight cost per unit shipped. In other cases, the vendor will grant freight pre-paid if a full truck load is shipped at once.
In either case the buyer is trying to decide whether the savings in freight is worth the extra carrying cost of the unwanted inventory. Rather than using spreadsheets and rules of thumb, the MARS) Inventory Replenishment and Forecasting software can automate this decision for you. The “Discount” feature in MARS deals with just this type of decision. The question is how to make the discount feature of MARS work in this situation, since the discount being offered with a full truck is not clear.
Let’s first deal with the situation where there is a flat shipping rate for the truck whether it is full or not. The first step is to develop a figure that represents the discount being offered for the balance of the product to put into the MARS system. This is done as follows:
Build a MARS replenishment order, independent of any truckload considerations. Perform whatever modifications are called for. If the truck load requirement is met, then there is no issue.
If the solution comes out less than a truck load, calculate the implied freight rate of a full truck load. (If you do not know the value of a typical full truck load, use goal seeking to create a trial full load and note the dollar value from the final order screen.) The freight rate is then simply the shipping cost for the load divided by the value of a fully loaded truck. (e.g. assume that a fully loaded truck contains roughly $50,000 of product, and the shipping cost is $750, then the implied freight rate is 1.5% – 750 divided by 50,000 times 100).
Then use the “order discount” feature to check what MARS would do with a discount equal to the figure just calculated (1.5% in this case). Since all the extra product would be available at zero incremental freight it is equivalent to a discount of that amount.
If the solution calls for a full truck or more you know it is a good policy to go for the full truckload. (Use the “Goal Seeking” feature to round down to the full truck load if the solution is in excess of the full truckload.)
If the solution is short of a full truckload use the new solution as it stands since it represents an optimum order under the circumstances. (e.g. the added product is called for since it is coming in at the “discount” represented by the zero freight cost.)
The procedure for this situation is similar to that above except you should use the actual freight rate for a less than truckload shipment (LTL rate).
Additionally, your solution will either be to go for the order developed originally, or for the full truckload – nothing in-between. Therefore if the discounted order does not reach a full truckload then revert to the original order and accept the freight cost.
There is one other consideration that we are not addressing. It may be that you should be lengthening your order frequency if you are having trouble reaching a full truckload by a normal unforced MARS run.
After all, in the final analysis you are not going to bring in more product than you are going to sell, except for some inventory reduction or gain. Consequently, if you are constantly forcing the system to go to a full truckload via goal seeking, then by definition you are creating an added layer of inventory that the system does not want.
There is a further complication, however. If it takes an abnormally long time to reach a full truckload (modest monthly demand for the vendor’s product in relationship to the minimum order size) then more frequent reordering may be called for, and the above logic is pertinent to see if going for the full truck periodically is justified.
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