Incorporating transportation costs into supplier selection and orderquantity allocation

Typical supplier selection and order quantity allocation decisions are concerned with obtaining the optimal inventory policy that simultaneously determines how much, how often, and from which suppliers to order. In doing so typical inventory costs (setup, holding, and purchasing) are considered. However, a relevant cost that has been repeatedly overlooked in this type of decisions is the transportation cost. For this reason, this research proposes a mathematical model that not only considers typical inventory costs but also transportation costs to determine the optimal order allocation to selected suppliers. Since actual transportation freight rates are neither continuous nor convex, this research proposes the use of two continuous functions to emulate the actual freight rates and obtain near-optimal solutions. These two functions are easy to implement and do not increase the complexity of the mathematical model.