3rd Conference of Transportation Research Group of India (3rd CTRG)

Effect of Urban Freight Regulations on Supply Chains: A

Game Theoretic Approach Using Bi-Level Programming
Chitresh Kumara, *, T. A. S Vijayaraghavanb, A. K. Chakrabortyc , R. G.
Thompsond
a
XLRI Xavier School of Management, Jamshedpur, 831001, India, fb12001@astra.xlri.ac.in
b
XLRI Xavier School of Management, Jamshedpur, 831001, India, tasviji@xlri.ac.in
c
XLRI Xavier School of Management, Jamshedpur, 831001, India, akcharaborty@xlri.ac.in
d
Department of Infrastructure Engineering, University of Melbourne, Melbourne, Parkville VIC 3010, Australia,
rgthom@unimelb.edu.au
* Corresponding Author

Abstract. The paper intends to identify effect of urban freight regulations on product prices. The costs have
been studied in terms of technological restriction, time windows and entry penalties and economic cost of
congestion and pollution. Government’s social cost function has been introduced as a constraint in the buyer
supplier Stakelberg problem and uses a bi-level programming approach to find the optimal quantity. We
found that with low penalties there is hardly any effect on the lot size and price of the product. However,
considering a linear demand the product price coefficient is sensitive to the lot size and penalty. Hence, for
product where prices and very sensitive to the demand or demand is sensitive to prices or time value of
money is very high e.g. perishable goods supplies are more affected by urban freight regulations.

Keywords: Supply Chain, Economic Order Quantity, Urban Freight Regulations, Stackelberg Model, Bi-
Level Programming

Introduction

Traditionally, Urban freight regulations have been studied from public policy perspective
but have cost implications on the product and supply chains. This paper attempts to
identify effect of urban freight regulations on product prices
One of the earliest works on multi-stage, single product one-on-one ordering policy
and the effects of integrated and non-integrated system on the economic lot sizing was by
[1]. [2] Provided the integration of aggregate production planning and forecasting with
production-inventory modeling for a multi-stage production planning. However, these
models optimized at an intra-firm level. The concept of lot/batch order as negotiation
between buyer and the supplier with provision of quantity discounts was provided by
various studies like [3]–[6]. However, Goyal [5] developed the model while removing lot-
to-lot constraint. [7] Provided preferential lot sizing from vendor’s perspective, influenced
by buyer and vender’s set-up costs respectively. The model also included quantity discount
in transportation costs. [8] developed model by constraining amount of quantity discounts
and providing substitution of lot-to-lot policy. [9] Developed models that focused upon
pricing policies for quantity discounts while sharing the savings between buyer and
supplier.
A classification was provided by [5] integrated inventory models. The four categories
were – models with joint ELS (Expected Lost Sales), models with buyer-supplier
coordination with simultaneous Joint ELS, models coordinating but not proposing joint
ELS and buyer-supplier models with market considerations.
Most of these models focused on a lot-to-lot approach where, lead times were considered
zero or fixed. [10] Developed an inventory model, which considered lead time as a
decision variable, this variability introduction was closer to the concept of JIT (Just in

Kumar, Vijayaraghavan, Chakraborty, Thompson

Time) approach of reducing lead time to near zero. Similarly [11] provide a mixed integer
bi-objective model which focuses on the issues of JIT e.g. minimizing surpluses and back-
orders alongside cost optimization in a multi-echelon model (three levels). [12] Provided a
joint ELS model for JIT, the model differed from traditional lot sizing approach as it
considered reducing costs for both buyer and supplier in an integrated manner while giving
consideration to the JIT philosophy of reducing set-up costs, hence reducing batch sizes.
[13] Emphasized upon minimization of transportation costs within supply chain and hence
developed a synchronized model, which also focused on logistical issues of vehicle
routing.
Using linear demand assumption [14] developed a bi-echelon models for buyer driven and
supplier driven models. Their analysis provided insights about market pricing and power
structure in addition to retail and wholesale pricing policies, where both of these prices are
related in linear manner.
[15] Developed a model for transportation mode and inventory integration for a single-
echelon multi-facility system and substantiate the benefits. [16] Developed a model for
product that has a seasonal finite demand and where demand is sensitive to stock
availability and price. [17] Developed a similar model for generic product based on game
theory, which incorporated price and inventory sensitivity for a multi-echelon supply
chain.

Cost of Government Regulations and Supply Chains

As highlighted in the earlier discussion, social costs were not incorporated in such models
as they operated from buyer or supplier perspective. Social Cost of production or firm
activities have been studied from public policy in multiple ways i.e. emissions, congestion,
cost of regulation etc. [18]–[20]. [21]–[23] have studied the congestion aspect and its
economic value. [24] Studied the regularity constraints in terms of factors and economies
of scale and pricing and firm competitiveness vis-à-vis social costs. [25] Studied various
externalities arising due to production and consumption, while developing models for
efficient use of resources. [26] Attempted to identify social cost of carbon using various
cost-benefit approaches. [27] Studied 88 chemical firms to show advantages of doing
environmental management at firm level. Similarly, there are studies in areas of Strategy,
Finance and Accounting, CSR and Firm Performance, Social welfare and private profit
[28]–[33]. However, cost of regulation or social cost has not been studied amidst the
supplier-buyer aspect of supply chain. Some efforts have been made to study the greening
of supply chain or to make supply chain overall efficient, by optimizing resource uses or
reducing carbon footprints or choosing efficient modes for freight movement in the urban
areas [29]. However, there is need for studying models, which attempt towards integrating
the cost of manufacturer / Vendor/ Distributor, Retailer and government (which attempts
towards maximizing social welfare thereby forming policies and regulations)[34].

The Model
The model developed is a single buyer – single manufacturer (supplier/vendor) – Multi
product model. It (Model) provides a framework to consider government as third
stakeholder along with buyer and supplier, hence, attempting towards minimizing the
overall social and private cost. The focus is towards maximizing overall benefit, while
attempting to understand the implications of the traditional buyer-supplier model when
social cost and benefits are also added within the model. The production and the inventory
model are lot to lot and system of transportation used is freight on board (FOB). A bi-level

Kumar, Vijayaraghavan, Chakraborty, Thompson

programming[35]–[40] model has been developed, where at lower level attempt has been
made to minimize the cost of buyer and supplier. At the next level (Higher level) social
benefits have been maximized. The model has been developed considering all factors like
cost of regulation, cost of technology upgradation of the plant as well as for the transport
fleet, inventory and stock-out costs and lead-times.
It is considered that because of some government regulation firm has to opt for certain
production technology and certain transportation technology. Government does this to
reduce pollution and improve social benefits, meanwhile incurring some costs in the
process. Adoption of new technologies under regulation would mean increase in cost of
production and distribution for firm, which would be amortized on a yearly basis by
certain percentage. This cost needs to be considered within the model. In order to reduce
congestion within the city the government would put some space and time bound access
restriction of the commercial vehicles, violating regulations attract penalties, the second
level of the model would actually attempt to find out optimum level of social benefits in
terms of congestion averted, pollution reduced and monetary gains from the penalization.
Following are the list of variables considered for model optimization.

Supplier related variables

Annual Demand per year – D
Production Cost per product per unit -c
Production Set Up Cost – S/Order
Cost of Production Technology
Upgradation= ΔPtn (As annual cost of
capital per year)
Cost of Vehicle Technology Upgradation
= ΔVtn
Vehicle Capacity = C1
Inventory Holding Cost = hS/unit/day
Inventory Stock Out Cost = hS-/unit/day
Per product unit volume (p) = V
Stock-out Ratio= α
!".!"  !"#$%  !"#$  !"#$%&  !"#  !"#$!%&$"'  !"#$%
!"#$%  !".!"  !"#$%  !"#$  !"#  !"#  !""#!$  !"#$%!
=β
Total Installed Capacity = IC
Price of Fuel = PoF

Costs to Buyer
Product Order Lead time = tb
Ordering Cost = H/order
Inventory Holding Cost = hB /unit/day (as
% of unit cost)
Stock out Cost = hB-/unit/day(as % of unit
cost)

Average Loading Unloading Time = 𝐿

(hours)
Per Unit Price Paid by Buyer = w (for
product a)
Existing Ordering Quantity = Q Unit

Kumar, Vijayaraghavan, Chakraborty, Thompson

Social Cost Variables
DBS = Distance between buyer and supplier
𝑣!" = 𝑣𝑒ℎ𝑖𝑐𝑙𝑒  𝑠𝑝𝑒𝑒𝑑  𝑏𝑒𝑡𝑤𝑒𝑒𝑛  𝑏𝑢𝑦𝑒𝑟  𝑎𝑛𝑑  𝑠𝑢𝑝𝑙𝑖𝑒𝑟   (During night/non-
congested/permitted hours)
𝑣′!" = 𝑣𝑒ℎ𝑖𝑐𝑙𝑒  𝑠𝑝𝑒𝑒𝑑  𝑏𝑒𝑡𝑤𝑒𝑒𝑛  𝑏𝑢𝑦𝑒𝑟  𝑎𝑛𝑑  𝑠𝑢𝑝𝑙𝑖𝑒𝑟  (During restricted/day hours)
𝑃! = 𝑃𝑎𝑟𝑘𝑖𝑛𝑔  𝐶ℎ𝑎𝑟𝑔𝑒𝑠  𝑎𝑡  𝑏𝑢𝑦𝑒𝑟  𝑓𝑜𝑟  𝑢𝑛𝑖𝑡  𝑡𝑖𝑚𝑒
0, 𝑓𝑜𝑟  𝐸 = 10  𝑝𝑚  𝑡𝑜  8  𝑎𝑚  
𝐸 = 𝑇𝑖𝑚𝑒  𝑤𝑖𝑛𝑑𝑜𝑤 =
 1, 𝑜𝑡ℎ𝑒𝑟𝑤𝑖𝑠𝑒
𝑃𝑒 = 𝑝𝑒𝑛𝑎𝑙𝑡𝑦  𝑡𝑜  𝑒𝑛𝑡𝑒𝑟  𝑖𝑛  𝑛𝑜  𝑒𝑛𝑡𝑟𝑦  𝑡𝑖𝑚𝑒
Fv = Avg. Rate of fuel consumption for per unit freight volume at speed v per unit
kilometer
Benefit of per unit pollution reduced = Value of non-emitted gases X emission reduced /
Liter

Total Cost
The following section describes the total cost incurred by the three actors annually so as
to meet the demand.

Total Cost for the Supplier (Vendor) (TVC = SF)

In a FOB system, with a lot-to-lot production policy, total cost of production would
include, set-up cost for each batch, production cost per product, transportation cost,
annual extra cost for technology upgradation, inventory carrying and stock-out costs.
Hence, Total Vendor Cost (TVC) = Set Up Cost + Annual Production Cost +
Transportation Cost + Annual Capital cost of New Technology + Inventory Cost + Cost
of New Vehicle Purchase + Parking and other Charges (e.g. entry restrictions)
!
Annual  Set  Up  Cost   =   ! 𝑆…………………….. (1)
Annual  Production  Cost = 𝐷. 𝑐
Cost of newer or cleaner technology because of government restrictions can be added
on a yearly basis or on product unit basis. This could be based on annual cost of capital
per year divided by plant capacity installed. Further cost can be also calculated per unit
based on actual production units.
𝚫𝑃𝑡!
𝐶𝑜𝑠𝑡  𝑜𝑓  𝑇𝑒𝑐ℎ𝑛𝑜𝑙𝑜𝑔𝑦 =  𝐷.
𝐼𝐶
Considering that fleet size remains constant Cost of Fleet upgradation would be
amortized over the years with some percentage per year, hence per unit cost would be
treated similarly like plant technology upgradation.
Therefore per unit cost of vehicle technology upgradation
𝚫!"
= Vehicle  technology  upgradation =  𝐷 !" !
However, considering that new vehicle would make multiple trips between vendor and
!.!
supplier the total no. of trips =   !! ………………………………. (5)

Annual average inventory carrying cost = Annual  average  inventory  carrying  cost   =
!
∙   ℎ! ! … … … … . (6)
!
Stock-Out Cost = Stock − Out  Cost =  𝛼   ∙ 𝐷. ℎ! !  … … … … … … . (7)
 3rd Conference of Transportation Research Group of India (3rd CTRG)

!.!
Cost of transportation = Cost  of  transportation   =   !! ⋅   𝐷!" ∙ 𝐹! ⋅ 𝑃𝑜𝐹 ⋅ 1 − 𝛽 +
!.!
  !
⋅   𝐷!" ∙ 𝐹! ! ⋅ 𝑃𝑜𝐹 ⋅ 𝛽 … … … … … . . (8)
!"
Cost of Parking = Cost  of  Parking   =  𝐿 ∙ 𝑇 ∙ !!  … … … … … … … … … … … (9)
Cost of Penalty for entering into no-entry zone =
!"
Cost  of  Penalty  for  entering  into  no − entry  zone   =   !! ⋅ 𝛽 ∙ 𝑃𝑒 … … … … . (10)

Hence, total cost to Vendor/Supplier would be TVC = 1 + 2 + 3 + 4 + 6 +

7 + 8 + 9 + (10)

Total Cost for Buyer (BF)

Total cost to the Buyer (TBC) would be price paid for the product, inventory holding
cost, opportunity cost due to stock out and ordering cost.
TBC = Product Price Paid + Ordering Cost + Inventory Holding Cost + Inventory
Stock-out Cost
Product Price Paid = 𝑤 ∙ 𝐷 … … … … … … … … … … . (11)
Ordering Cost = (D/Q)  𝐻 … … … … … … … … … … … … … (12)
!
Inventory Cost = Inventory  Cost   =   ! ∙ ℎ! … … … … … … … … … … … … (13)
Stock Out Cost Stock Out Cost =𝛼 ∙ 𝑡 − 𝑡! . ℎ!! . 𝐷 … … … … … … … (14)
Where tB is emergency replenishment time and t is order lead-time and α  is the stockout
probability.
Hence, TBC = (11) + (12) + (13) + (14)

Total Social Cost (GF)

Social cost and benefit is considered in two ways, first direct costs e.g. cost of
implementing regulations, then indirect costs e.g. cost of congestion and cost of
pollution, then there are benefits in terms of penalty levied from regulation
implementation and in case of reduced congestion and pollution due to implementation
these would considered as benefits. Government would attempt to optimize benefits
thereby making laws to reduce pollution and congestion this restrictive natured policy
making would result towards certain penalties. In a bi-level programming deciding
these penalties would be higher-level objective, whereas to optimize buyer-vendor cost
would be lower level objective. Hence, as discussed earlier
Total Social Cost (TSC) = Cost of Congestion + Cost of regulation – Benefits from
technological introduction – benefits from time windows

Cost of Congestion (CoC)

CoC would occur when the vehicle would enter the urban area at the time of congestion
i.e. restricted day time period hence,
!
! ! ! ! ∙! !
CoC = 𝛽 ∙ 𝐸𝑉𝐶 ∙   !!"
!
− !!" ∙ !!!!! … … … . . (15)
Where, beta represents the probability that the vehicle would enter the city during
congested period. EVC is the Economic Value of Congestion Per Trip/Per unit time.
Hence, EVC is multiplied by the time difference per trip and total no. of trips.

Cost of Regulation

Kumar, Vijayaraghavan, Chakraborty, Thompson

 3rd Conference of Transportation Research Group of India (3rd CTRG)

Usually cost of forming and enforcing regulations by government is charged in terms of

taxes. Actual taxes consist of a lot of other regulative and various issues. However, from
the modeling, only regulative share of per unit tax collection is being considered.
Hence, 𝐶𝑜𝑠𝑡  𝑜𝑓  𝑅𝑒𝑔𝑢𝑎𝑙𝑡𝑖𝑜𝑛 =  𝑙 ∙  𝐷 … … … … … … (16)
Where l can be assumed as per unit tax (or cost per unit incurred by government to
regulate)

Benefits from Technological upgradation (Plant/ Supplier) = Lower emission

=   𝐷 ∙ 𝐴𝑃𝑅 ∙ 𝑉𝐴𝑃𝑅 … … … … … … … … (17)
Where, APR = Average Per Unit Pollution Reduction and
VAPR = Economic Value of Average Per Unit Pollution Reduction.
Similarly, Benefits of Technological Upgradation (Vehicle Fleet) = 𝐷!" ∙ 𝐹! ! − 𝐹! ∙
!.!
!!
!"
Direct benefits from time window restrictions = !! ∙ 𝛽 ∙ 𝑃𝑒
Hence, final cost to the government = Costs − Benefits = 15 + 16 −   17 −
  18 −   (19)
Or total social benefit (GF)= 17 +   18 +   (19) −   15 + 16
If we consider model as a bi-level programming, with Stackleberg duopoly [35], where
buyer and supplier would attempt towards optimizing their costs at the lower level
(followers) and
Max GF (Pe, Q, l).................. (20)
S.t. 𝑄  𝜖  𝑎𝑟𝑔𝑀𝑖𝑛  𝑺𝑭 𝑄 +   𝑩𝑭 𝑄 … … … … … … … . (21)
S.t. 𝐷 ≤ 𝐼𝐶 … … … … … … … (22)
𝑄, 𝐷, 𝑙, 𝑃𝑒, 𝐼𝐶   > 0 … … … … … … … … . . (23)

In order to reduce complexity, writing the equations for single product - single period
model. i.e. for deterministic demand.
Gives the functions as
!∙! !∙!
Max. 𝐷!" ∙ 𝐹! ! − 𝐹! ∙ !! + 𝑄 ∙ 𝐴𝑃𝑅 ∙ 𝑉𝐴𝑃𝑅 + !! ∙ 𝛽 ∙ 𝑃𝑒 − 𝑙 ∙ 𝑄 −
!!" !!" !∙!
𝛽 ∙ 𝐸𝑉𝐶 ∙   !!
− !
∙ !!
… … … … … … … … (24)  
! !
Considering 𝐷!" ∙ 𝐹! ! − 𝐹! ∙ !! = 𝐴! , 𝐴𝑃𝑅 ∙ 𝑉𝐴𝑃𝑅 = 𝐴! , !! ∙ 𝛽 =
! ! !
𝐴! , 𝛽 ∙ 𝐸𝑉𝐶 ∙   !!"
!
− !!" ∙ !! = 𝐴!
Then the simplified equation becomes,
Max. 𝐴! ⋅ 𝑄 + 𝐴! ⋅ 𝑄 + 𝐴! ∙ 𝑄 ⋅ 𝑃𝑒 − 𝑙 ⋅ 𝑄 − 𝐴! ⋅ 𝑄 … … … (25)
Similarly second level objective could be written as,

S.t. 𝑄  𝜖  𝑎𝑟𝑔𝑀𝑖𝑛  𝑺𝑭 (𝑄, 𝑃𝑒)   +   𝑩𝑭 (𝑄, 𝑃𝑒)

𝚫!"! ∆!"! !∙!

= Min. 𝑆 + 𝑄 ∙ 𝑐 + 𝑄 ∙ !"
+ !"
∙ 𝑄 + 𝛼 ∙ 𝑄 ∙ ℎ!! + !!
⋅   𝐷!" ∙ 𝐹! ⋅ 𝑃𝑜𝐹 ⋅
!∙! !∙! !∙! !
1 − 𝛽 +   !! ⋅   𝐷!" ∙ 𝐹! ! ⋅ 𝑃𝑜𝐹 ⋅ 𝛽 + 𝐿 ∙ 𝑇 ∙ !!
+ !!
∙ 𝛽 ∙ 𝑃𝑒 + 𝑤 ∙ 𝑄 + 𝐻 + ! ℎ! +
𝛼 ∙ 𝑡 − 𝑡! . ℎ!! . 𝑄 … … … … … … (26)
The Equation Can be written as
Min. 𝑆 + 𝐵! ∙ 𝑄 + 𝐵! ∙ 𝑄 ∙ 𝑃𝑒 + 𝐵! ∙ 𝑄 + 𝐻 … … … … (27)

Kumar, Vijayaraghavan, Chakraborty, Thompson

 3rd Conference of Transportation Research Group of India (3rd CTRG)

𝚫!"! ∆!"! ! !
Where, 𝐵! =   𝑐 + !"
+ !"
+ 𝛼 ∙ ℎ!! + !! ⋅   𝐷!" ∙ 𝐹! ⋅ 𝑃𝑜𝐹 ⋅ 1 − 𝛽 +   !! ⋅   𝐷!" ∙
!
𝐹! ! ⋅ 𝑃𝑜𝐹 ⋅ 𝛽 + 𝐿 ∙ 𝑇 ∙ !!
!
𝐵! =   !! ∙ 𝛽, and
ℎ!
𝐵!   =  𝑤 + + 𝛼 ∙ 𝑡 − 𝑡! . ℎ!!
2
Further Simplification
Gives Min. 𝐵! ∙ 𝑄 + 𝐵! ∙ 𝑄 ∙ 𝑃𝑒 + 𝐶!
Where, 𝐵!   = 𝐵! + 𝐵!  𝑎𝑛𝑑  𝑆 + 𝐻 = 𝐶!
S.t. 𝑄 ≤ 𝐼𝐶
𝑄, 𝑙, 𝑃𝑒 > 0
Now considering a situation where, the Installed Capacity (IC) is 12,000 (from now
onwards all costs are in Rupees, mentioned otherwise), the investment in plant’s
technological upgradation Δ𝑃𝑡! for this one cycle is 60,000, the investment in vehicle
technological upgradation (Δ𝑉𝑡! ) is 20,000 and previous cost of production was (c) –
2,500, the stock-out cost (ℎ!! ) is 0.05% of the product cost per unit, the probability of
stock-out (α) is 0.2. The inventory holding cost is 0.01% of per unit cost and stock-out
cost at buyer side (ℎ!! ) is 0.02% per unit cost. The distance between buyer and supplier
(D!" ) is assumed to 60 kilometers. The speeds congested (during restricted time period)
and non-congested (unrestricted time window) are assumed at 20 and 30 kmph
respectively. The fuel consumption during the same periods is assumed at 4 kmpl and 5
kmpl respectively. Set-up cost for the vendor is 6,000 and the Order Cost for the buyer
is 600. The price of fuel (PoF) is 75 per litre. Average Rate of Pollution (APR) is taken
as 2640 gm CO2 per liter of fuel[41].. The economic value of CO2 (VAPR) is taken as
($55) 3300 per ton [20]The average value of congestion is taken as 50/hr [22]. The price
paid to vendor by buyer 5000 per unit. The volume per unit is 1 and the vehicle capacity
per trip is 20 volume units. Average parking time is 1.5 hours and average parking rate
is 20 per hour. The taxation per unit for regulation purposes has been taken as 10% of
traditional cost of production. Using, these assumed figure for the bi-level programming
we get the equations as;
Max. 0.15 ⋅ 𝑄 + 8.71 ⋅ 𝑄 + 0.01 ∙ 𝑄 ⋅ 𝑃𝑒 − 𝑙 ⋅ 𝑄 − 0.5 ⋅ 𝑄
Or Max. 8.36 ∙ 𝑄 + 0.01 ∙ 𝑄 ⋅ 𝑃𝑒 − 𝑙 ⋅ 𝑄 …. (28)

S.t. 𝑄  𝜖  𝑎𝑟𝑔𝑀𝑖𝑛.                      7695.16 ∙ 𝑄 + 0.04   ∙ 𝑄 ∙ 𝑃𝑒 + 6600 ………….. (29)

𝑆. 𝑡.              𝑎     < 𝑄     <    𝑏, 𝑤ℎ𝑒𝑟𝑒  𝑎 < 𝑏 < 12000 … …(30)
𝑑       < 𝑃𝑒     <    𝑒 …………. (31)
                                                     𝑎, 𝑏, 𝑄, 𝑃𝑒 > 0 ………. (32)

Considering the B2 has a value of 0.04 and even though a V/C value of 1/20 is on the
higher side with Beta value of 0.2 it could be stated that under normal condition the
prohibitive nature of penalties would not a deterrent enough this can also be seen using
a simulated values of the minimization equation for Q ranging between 1000 and 12000
with an interval of 1000 each and Pe ranging from 200 to 3000 with an interval of 200
also shown in figure 1. Hence, for Equation (29) values of Q and Pe are very much
dependent on a,b,d and e. One thing can also be assumed that entry restriction penalties
needs to be exorbitantly high for them be a deterrent in for entry (Figure 1 shown in red)
as coefficient of Q.Pe are very small as compared to coefficient of Q.
Figure 1: Cost, Penalty and Batch Size

Kumar, Vijayaraghavan, Chakraborty, Thompson

 3rd Conference of Transportation Research Group of India (3rd CTRG)

2500

2000

Penalty 1500

1000

500

0
12000
10000
12
8000 10
6000 8
4000 6
8
4 x 10
Batch Size 2000 2 Cost
0 0

However, if we consider the annual demand to be linear [14], [42] i.e. 𝐷 = 𝑚 − 𝑛𝑝,
where R1(retailing price) and demand (D) are always non-negative then,
𝑚 − 𝑛𝑝 ∙ 𝐻 𝑄
Π! = 𝑝 ∙  𝑚 − 𝑛𝑝 −   + ∙ ℎ! + 𝛼 ∙ (𝑡 − 𝑡! ) ∙ ℎ!! ∙ (𝑚 − 𝑛𝑝) … (33)
𝑄 2
Differentiating w.r.t. 𝑝  𝑎𝑛𝑑  𝑄  𝑤𝑒  𝑔𝑒𝑡
𝑑Π! 𝑛
= 𝑚 − 2𝑛𝑝 + ∙ 𝐻 −  𝛼 ∙ 𝑡 − 𝑡! ∙ ℎ!! ∙ 𝑛 … … … (34)
𝑑𝑅! 𝑄
𝑑Π! (𝑚 − 𝑛𝑝) ∙ 𝐻 ℎ!
= − … … … … (35)
𝑑𝑄 𝑄! 2

Equating these two equations against zero and finding the value of Q and we get
2 𝑚 − 𝑛𝑝 𝐻
𝑄 =   … … … … (36)
ℎ!
Which is the usual function, however, using
ℎ! ∙ 𝑄! 1
𝑛 =   𝑚 − … … … … (37)
2𝐻 𝑝
In Equation (34) gives an equation of third degree in Q, which is
ℎ! 𝑤 ∙ ℎ! 𝛼(𝑡 − 𝑡! )ℎ!! ∙ ℎ! ! ℎ! ! 𝑤 𝛼 𝑡 − 𝑡! ℎ!!
− − 𝑄 − 𝑄 + ∙𝑚+ ∙𝑚 𝑄
2𝐻 𝑝 ∙ 2𝐻 𝑝 ∙ 2𝐻 2𝑝 𝑝 𝑝
𝐻∙𝑚
+ = 0  
𝑝
The equation is in the form 𝐷! ∙ 𝑄! − 𝐷! ∙ 𝑄! + 𝐷! ∙ 𝑄 + 𝐷! = 0
! !
! !∙! ! !!!! !! ∙!! !! ! ! !!!! !!
Where, 𝐷! =   !!! − !∙!!! − !∙!!
, 𝐷! =   !!
, 𝐷! = !
∙ 𝑚 + !
∙ 𝑚  𝑎𝑛𝑑  𝐷! =
!∙!
!
Using the Values previously stated and 6000 for p

Kumar, Vijayaraghavan, Chakraborty, Thompson

 3rd Conference of Transportation Research Group of India (3rd CTRG)

Transforms the Equation to

0.041𝑄! − 0.004𝑄! + 𝑚 ∙ 𝑄 + 0.1 = 0 … … . (38)
Similarly,
Π! = 𝑤 𝑚 − 𝑛𝑝
𝑚 − 𝑛𝑝 𝑆 Δ𝑃𝑡! Δ𝑉𝑡!
−   + 𝑚 − 𝑛𝑝 𝑐   + 𝑚 − 𝑛𝑝 + 𝑚 − 𝑛𝑝
𝑄 𝐼𝐶 𝐼𝐶
𝑄 𝑉
+ ℎ! + 𝛼 𝑚 − 𝑛𝑝 ℎ!! + 𝑚 − 𝑛𝑝 𝐷 ∙ 𝐹 ∙ 𝑃𝑜𝐹 ∙ 1 − 𝛽
2 𝐶1 !" !
𝑉 𝑚 − 𝑛𝑝 𝑉 𝑚 − 𝑛𝑝 𝑉
+ 𝑚 − 𝑛𝑝 𝐷!" ∙ 𝐹! ! ∙ 𝑃𝑜𝐹 ∙ 𝛽 + 𝐿∙𝑇+ ∙𝛽
𝐶1 𝐶1 𝐶1
∙ 𝑃𝑒 … … … … … (39)
Differentiating w.r.t. to R1 and Q gives,
dΠ! 𝑛𝑆 Δ𝑃𝑡! Δ𝑉𝑡! 𝑉
= −𝑛𝑤 + + 𝑛𝑐 + 𝑛 +𝑛 + 𝛼 ∙ 𝑛 ∙ ℎ!! + 𝑛 𝐷 ∙ 𝐹 ∙ 𝑃𝑜𝐹
𝑑𝑅! 𝑄 𝐼𝐶 𝐼𝐶 𝐶1 !" !
𝑉 𝑛∙𝑉 𝑛∙𝑉
∙ 1−𝛽 +𝑛 𝐷!" ∙ 𝐹! ! ∙ 𝑃𝑜𝐹 ∙ 𝛽 + 𝐿∙𝑇+ ∙𝛽
𝐶1 𝐶1 𝐶1
∙ 𝑃𝑒 … … (40)
dΠ! 𝑛𝑝𝑆 ℎ!
= − ! − … … … … (41)
𝑑𝑄 𝑄 2
Putting Equation (40) equal to zero gives,
𝑆 𝑉
− + 𝐶𝑜𝑛𝑠𝑡𝑎𝑛𝑡   − ∙ 𝛽 ∙ 𝑃𝑒 = 0
𝑄 𝐶
!!"! !!"! ! !
Where Constant = 𝑝 − 𝑤 − !" − !" − 𝛼 ∙ ℎ! − !! 𝐷!" ∙ 𝐹! ∙ 𝑃𝑜𝐹 ∙ 1 − 𝛽 −
! !
!!
𝐷!" ∙ 𝐹! ! ∙ 𝑃𝑜𝐹 ∙ 𝛽 − !! 𝐿 ∙ 𝑇
Re-arranging gives the equation,
𝐶𝑜𝑛𝑠𝑡𝑎𝑛𝑡 ∙ 𝐶1 ∙ 𝑄 − 𝑉 ∙ 𝑄 ∙ 𝛽 ∙ 𝑃𝑒 − 𝑆 ∙ 𝐶1 = 0
48032 ∙ 𝑄 − 4 ∙ 𝑄 ∙ 𝑃𝑒 − 12000 = 0 … … … … … (41)
Equation (38) and (41) simultaneously for various values of Q (1000:12000) gives, that
penalty has no impact as such on penalty or of penalty for batch size of more than 1000.
Plotting all three variables m, Pe and Q together using equations (38) and (41)
simultaneously gives all values for m as negative however, for smaller negative value
(0.5 x 10-4 to 1.5 x 10-4 the effect of sharp rise in penalty is high upon the quantity size,
where as for higher penalty values, the impact is far less. This means for goods where,
prices are low and they are time sensitive, urban freight regulation would have
significant cost impact. This is actually the case for perishable goods like milk and
vegetable supply within urban areas.

Kumar, Vijayaraghavan, Chakraborty, Thompson

 3rd Conference of Transportation Research Group of India (3rd CTRG)

Pe

Q
m

Figure 2: Relationship between m (Price Coefficient), Pe (Penalty) and Q (Order

Quantity)

Conclusions

Developing convex functions for social cost is tough. Since social cost is a function of
producer welfare and consumer welfare, an expression is required that constrains the
reduced benefits in case of low supply than demanded quantity by the retailer/Buyer.
Introduction of penalty lowering the consumer surplus for such an event would allow the
function to be convex in nature, as against the existing linear nature.
Since, penalty is introduced only for the emergency deliveries in case of stock-out,
influence of these deliveries on the model is insignificant, for them to be influential in lot
sizing or decision making they needs to be exorbitantly on the higher side.
Introduction of the third actor introduces multiple variables, i.e. taxation, penalty. Though,
both of them could be higher, still there is a limit to charge a vehicle to entering a no entry
zone as seen is equation (28) and (41) this variable needs to be large enough to influence
the overall batch or demand size, which cannot be the case. The multiplicity of variables
allows us to increase the sensitivity of the model, however, at the same time, makes it
cumbersome for finding a theoretical solution.
A Deterministic Demand or a linear demand reduces the convexity of cost functions as we
can see that most of the times second order derivatives are either zero or a constant.
Number of trips cannot be determined through dividing total annual demand by batch size,
hence, stock-out v/s LTL emergency deliveries also need to be part of the model.
However, this makes the problem a vehicle routing problem using integer programming.

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 3rd Conference of Transportation Research Group of India (3rd CTRG)

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