Optimal order lot sizing and pricing with free shipping

Guowei Hua, Shouyang Wang, Edwin Tai Chiu Cheng

Research output: Journal article publicationJournal articleAcademic researchpeer-review

28 Citations (Scopus)

Abstract

Companies, especially those in e-business, are increasingly offering free shipping to buyers whose order sizes exceed the free shipping quantity. In this paper, given that the supplier offers free shipping, we determine the retailer's optimal order lot size and the optimal retail price. We explicitly incorporate the supplier's quantity discount, and transportation cost into the model. We analytically and numerically examine the impacts of free shipping, quantity discount and transportation cost on the retailer's optimal lot sizing and pricing decisions. We find that free shipping can benefit the supplier, the retailer, and the end customers, and can effectively encourage the retailer to order more of the good, to the extent of ordering a few times of the optimal order lot size without free shipping. The order lot size will increase and the retail price will decrease if the supplier offers proper free shipping.
Original languageEnglish
Pages (from-to)435-441
Number of pages7
JournalEuropean Journal of Operational Research
Volume218
Issue number2
DOIs
Publication statusPublished - 16 Apr 2012

Keywords

  • Free shipping
  • Inventory
  • Logistics
  • Pricing
  • Purchasing

ASJC Scopus subject areas

  • Modelling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management

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