DETERMINING ECONOMIC ORDER QUANTITY IN A TWO-LEVEL SUPPLY CHAIN WITH TRANSPORTATION COST

Abstract

This paper considers a two-level supply chain consisting of one warehouse and a number of identical retailers. Unlike the common practice which determines the optimal ordering policy according to inventory costs only, in this model we consider the transportation cost as well. We suppose that the delivery of each order from the warehouse to any retailer is made by a single vehicle without splitting. We also assume that there are three types of vehicles which are defined as small, medium and large. Each type has its own fixed cost, variable cost, and the capacity size. We assume that the demand rate at each retailer is known and the demand is confined to a single item. Shortages are allowed neither at the retailers nor at the warehouse. First, we obtain the total cost which is the sum of the holding and ordering cost at the warehouse and retailers as well as the transportation cost from the warehouse to retailers. Then, we find the economic order quantities for the warehouse and retailers which minimize the total cost.