Small order transportation costs in inventory control

The trend toward smaller order quantities embedded in modern inventory practices may be somewhat constrained by the higher unit freight rates usually charged for lower-size consignments. These higher rates often vary in a non-systematic way, in contrast to the regular step-wise increases normally associated with freight charges for larger quantities. Consequently, the standard practice of using average rates, applicable to relatively large order-size intervals may not capture the marginal effects of reducing order sizes. In this paper, the authors attempt to model the effect of these cost changes on ordering decisions. An example based upon small and general parcel rates from New Brunswick to various Canadian destinations is used to illustrate the main features of the paper.