Cheaper by the pallet? Multi-item procurement with standard batch sizes

Abstract

This research was motivated by challenges facing inventory managers at a major retail chain in deciding how often to order each product and whether to use a standard batch size of a pallet, a half-pallet, or even less. The retailer offers thousands of different products, but the total demand for a typical product is only a few pallets per year. Manufacturers offer lower per unit prices for larger standard batch sizes, but larger order quantities increase inventory holding costs. The inventory managers are also concerned about how the ordering strategy might affect transportation costs and material handling costs at the warehouse. We develop a framework and solution strategy to determine the best shipment frequency, standard batch size (from a set of options), and an ordering plan for a set of products procured from a single supply location. To do so, the inventory holding and material handling costs incurred by a single product are derived for a given review interval and standard batch size. We incorporate the individual product costs into an optimization model to find, for a given transportation interval (with a limit on transport capacity for each shipment), the best procurement plan considering variable procurement, inventory, material handling, and excess transportation costs. With this, several transportation intervals can be compared and the best one selected. To the best of our knowledge, this work is the first to consider the effects of transportation capacity and standard batch sizes in a multi-item procurement problem with the goal of minimizing transportation, inventory, and material handling costs.