INVENTORY POLICIES WITH FREIGHT AND INCREMENTAL QUANTITY DISCOUNTS

The effect of various freight-rate structures and incremental quantity (IQ) purchasing discounts on the firm's procurement and inventory decisions is examined. For ease of exposition, most of the elements of the models are introduced for the case where only one IQ break exists. Within this context, three types of freight rates are examined. The first considers a lower unit cost but a higher fixed charge for purchases above a certain limit. Another considers a flat fee plus a unit cost up to a certain level past which a constant fee is levied regardless of quantity. The third includes a flat charge for orders up to a given amount beyond which a fixed rate plus a unit fee is levied. The combination of these IQ and freight rate structures yields three different cases whose nature depends upon the relationship between the breaks. The model is then extended to the multiple IQ and freight discount case where a general structure is introduced which covers any sequence of freight and IQ discounts. Using this structure an appropriate solution algorithm is derived. Numerical examples are used throughout to illustrate the main features of the models.