Cheaper by the pallet? Multi-item procurement with standard batch sizes

Abstract

This research was motivated by challenges facing inventory managers at a major retail chain in deciding how often to order each product and whether to use a standard batch size of a pallet, a half-pallet, or even less. The retailer offers thousands of different products, but the total demand for a typical product is only a few pallets per year. Manufacturers offer lower per unit prices for larger standard batch sizes, but larger order quantities increase inventory holding costs. The inventory managers are also concerned about how the ordering strategy might affect transportation costs and material handling costs at the warehouse.We develop a framework and solution strategy to determine the best shipment frequency, standard batch size (from a set of options), and an ordering plan for a set of products procured from a single supply location. To do so, the inventory holding and material handling costs incurred by a single product are derived for a given review interval and standard batch size. We incorporate the individual product costs into an optimization model to find, for a given transportation interval (with a limit on transport capacity for each shipment), the best procurement plan considering variable procurement, inventory, material handling, and excess transportation costs. With this, several transportation intervals can be compared and the best one selected. To the best of our knowledge, this work is the first to consider the effects of transportation capacity and standard batch sizes in a multi-item procurement problem with the goal of minimizing transportation, inventory, and material handling costs. larger standard batch sizes. On the other hand, larger order quantities increase inventory holding costs. If items were ordered in full pallet quantities, average inventory levels might amount to months of supply. Under such policies, it was difficult to improve inventory turnover.The inventory managers also had the perception that larger order quantities led to greater material handling costs. In view of this, we decided to include the most significant elements of the material handling costs in our model. We elaborate on these costs later in this article.The standard batch size also affects variable purchasing costs. Retailers typically negotiate prices with suppliers on the basis of annual sales volume and standard procurement quantities. If the retailer does not always order exactly the same quantity (e.g., sometimes half pallets and sometimes full pallets), the actual purchase costs may depend upon the mix of quantities. Quite often, the manufacturer's pricing is driven by volume and the minimum purchase quantity. As such, we initially assume that the retailer simply orders standard batch quantities (usually one at a time

Multi-period supplier selection under price uncertainty

“…Xu et al (2000) study the single supplier problem in the presence of business volume discounts and setup costs. Rong et al (2012) study an interesting multi-item problem where the discounts are due to ordering in standard batches (eg, full pallets) and the buyer needs to determine the procurement strategy for each item to minimize procurement, transportation, inventory and material handling costs.…”

Development of a Gaussian Process Model as a Surrogate to Study Load Bridging Performance in Racked Pallets

“…Although the developed finite element model represents a robust baseline to use in studying the characteristics of a unit load and their influence on pallet performance, a full analysis of the trends and interactions of all the identified factors increases the computing requirements exponentially. A surrogate model of a complex finite element model is commonly utilized in such scenarios, providing not only a more efficient analysis tool but also an accessible method for industry practitioners to design unit loads using acceptable approximations [21][22][23][24][25][26][27].…”