Optimal single period order size under uncertain demand incorporating freight costs

Abstract

There is now greater scrutiny of freight costs by buyers who want to control inbound logistics cost. In this study, we consider the lot size problem faced by a buyer who plans product availability for a style good which has uncertain demand for the season. The buyer has only one opportunity to procure the good prior to the season and is responsible for paying for the freight. A buyer may opt for paying for the freight if he sees an opportunity for savings on freight costs. In some cases, the supplier may allow only for FOB origin orders. The order may span several truckload shipments and a remnant less-than-truckload shipment. We represent the freight cost for a less-than-truckload shipment by freight tariffs offered by public motor carriers, in practice. These freight tariffs typically entail six to seven breakpoints in terms of the weight of the shipment.