Modeling actual transportation costs in supplier selection and order quantity allocation decisions

Given the impact of transportation costs in both supplier selection and inventory management decisions in today's enterprises, this article addresses both problems simultaneously by developing a mixed integer nonlinear programming model to properly allocate order quantities to the selected set of suppliers while taking into account the purchasing, inventory, and transportation costs under suppliers' capacity and quality constraints. In particular, we focus on the usage of trucks as a means of transporting goods and the option of the full-truck-load versus less-than-truckload (LTL) is studied. Since actual LTL transportation costs are neither differentiable nor convex, they are modeled with a piecewise linear function using binary variables. It is shown that, considering actual transportation costs in inventory planning, not only affects the order quantities shipped from selected suppliers but also the actual selection of suppliers.