Improving Courier Service Network Efficiency through Consolidations

Abstract

Service network design is a significant consideration for courier companies because an efficient design reduces operating costs while maintaining service quality. While companies typically rely on subject-matter experts knowledge to modify their service network design on a regular basis based on changes in demand, some of them have also developed an optimization-driven approach to improve the design of their service network in the long-term. Typically, service networks are based on a hub-and-spoke design. However, operating costs may be reduced by adding consolidations on the pickup and/or the delivery routes into and out of hubs. Consolidations are locations where packages can be aggregated from multiple spokes to go into a hub or can be disaggregated to be delivered to multiple destinations from a hub. This service network design feature ultimately reduces the number of aircraft used on each route and therefore decreases the operating costs. In this study, we use Integer Programming with hierarchical objectives to generate consolidation options. The proposed algorithm accounts for network-wide demand considerations and aims at reducing costs from operating several modes of transportation by minimizing the number of consolidation locations while ensuring that every package is served and gets delivered on time at its intended destination. The algorithm is being implemented on the entire domestic U.S. market and has the flexibility to generate one or more consolidation options for each group of packages going from a given origin to a given destination. Results from the optimization are compared to solutions from a heuristic approach based on a series of geographical and operational rules. Results show that the optimization approach is able to generate better consolidation options compared to the heuristic approach. In particular, allowing packages to consolidate at a maximum of three consolidation locations results in a two percent reduction in the total costs over individual days of operations, and in nearly a one percent reduction in the total costs over a week of operations, for similar computational times. Although these reductions seem small, operating costs for courier companies tend to be in the millions or billions of dollars. Therefore, even a one percent reduction is significant.