An order-splitting model for supplier selection and order allocation in a multi-echelon supply chain

Abstract

This paper considers an integrated supplier selection and inventory control problem for a multi-echelon inventory system with an order-splitting policy. A buyer firm consisting of one warehouse and N identical retailers procures a type of product from a group of potential suppliers; the acquisition of the warehouse takes place when the inventory level depletes to a reorder point R, and the order Q is simultaneously split among m selected suppliers. We develop an exact analytical model for the order-splitting problem in a multi-echelon system, and formulate the supplier selection problem in a Mixed Integer Nonlinear Programming (MINLP) model. This model determines the optimal inventory policy that coordinates stock levels between each echelon of the systems while properly allocating orders among selected suppliers to maximize the expected profit. For verification and validation of the proposed mathematical model, we conduct several numerical analyses and implement simulation models which helps us demonstrate the model’s solvability and effectiveness.