Fixed Shipping Cost Allocation for Just-in-Time (JIT) Lot-Splitting

This paper studies benefits of just-in-time (JIT) lot-splitting and multiple shipments for an order placed by the retailer in a two-stage supply chain. In a typical order placement and delivery setting between the buyer and the vendor, the treatment of the shipping cost is not clear and is contingent on negotiations between the parties involved. The outcome of such settlement often results in suboptimal practices in the supply chain. This paper investigates how the optimal and incentive aligned allocation of the fixed shipping cost from the manufacturer to the retailer can be obtained with the lot-splitting policy. Numerical results indicate that both the lot-splitting policy parameter and the fixed cost structures (e.g., fixed shipping to ordering cost ratio) command significant impact on the shipment frequency and the supply chain cost. The paper further proposes an approach to identify settings beneficial for the system.