Incorporating transport cost in the lot size and pricing decisions with downward sloping demand

There is an increased emphasis in supply chain management on making all costs transparent. This has led to greater scrutiny of freight costs by the resellers who want to control their inbound logistics costs. An astute reseller may opt for paying freight when he sees an opportunity for savings. In some cases, a supplier may only sell on conditions of FOB origin. In this paper, we consider a reselling situation wherein the final demand is sensitive to the selling price and the reseller is responsible for paying for the freight. Given that transportation costs can be almost 50% of the logistics cost, there is a need for coordination between the reseller's purchasing function and his pricing policy. In this study, we formulate a model for determining the optimal lot size and the selling price for the reseller. Existing models for the problem have treated freight breakpoints in the same way as price breakpoints in a quantity discount schedule. In doing so, they have ignored the option of over-declaring the weight of the shipment which is routinely available to the buyer/shipper in practice. In this paper, we assume that the reseller has such an option. We also assume that in setting the size of the order/shipment, the reseller can choose between less-than-full-truckload or full-truckload shipment.