Continuous Review Inventory Model with Dynamic Choice of Two Freight Modes with Fixed Costs

We analyze a continuous review stochastic inventory model in which orders placed with a make-to-order manufacturer can be shipped via two alternative freight modes differing in lead-time and costs. The costs of placing an order and using each freight mode exhibit economies of scale. We derive an optimal policy for utilizing the two freight modes for shipping each order. This freight mode decision is delayed until the completion of manufacturing, and the optimal policy uses information about the demand incurred in the meantime. Further, given that the two freight modes are used optimally for shipping each order, we characterize the optimal reorder point and the optimal order quantity, and analyze the cost savings achieved due to postponement of the freight mode decision. We also provide analytical and numerical comparisons between the optimal solutions to our two freight model and the single freight models. Finally, we illustrate the properties of the optimal solution to our model using an extensive set of numerical examples.