A producer retailer inventory model with considerations of transportation cost

Two-echelon inventory systems are widely used to distribute products among the customers over wide areas. Many researchers have studied their operating characteristics under a variety of conditions and assumptions. In most papers attention has been paid to the minimisation of inventory costs, but the cost of transportation is an influential factor in setting the right levels of inventories among the echelons being neglected. In this paper, we consider an inventory system consisting of a producer and N-retailers with an assumed inventory policy. Determination of optimal retailers' orders and production quantities takes into account the transportation costs. We conclude that the model can effectively be used as a tool to increase pricing transparency among producer, retailer, and third party logistics service providers. It can also reflect the environmental (social) costs of transportation.