Estimating freight rates in inventory replenishment and supplier selection decisions

Given the impact of transportation costs on both supplier selection and inventory replenishment decisions in today’s enterprises, this article addresses both problems simultaneously by proposing a mixed integer nonlinear programming model to properly allocate order quantities to the selected set of suppliers while taking into account the purchasing, holding and transportation costs under suppliers’ capacity and quality constraints. It is shown that incorporating transportation costs in the process of selecting suppliers and establishing an inventory policy, not only affects the order quantity shipped from selected suppliers, but also the actual selection of suppliers. Because of the difficulty that arises when working with actual transportation freight rates in large-scale problems, two continuous functions that estimate actual freight rates are analyzed. It is shown that the use of these functions is very practical and easy to implement.