Learning-by-doing may not be enough to sustain competitiveness in a market

Abstract

• Buyer invests in the vendor's process to improve its competitive market position. • Develops an EOQ model with price dependent demand, analogous to head flow. • A faster learning rate than competitors ensures a prolonged profitability . • Improvements beyond learning-by-doing could be required for firms survivability . The economic order quantity model and its variants are the oldest reported scientific inventory models in the literature. They are mathematically simple to use and understand. This characteristic contributed to their popularity. However, they have limitations that restrict their application in practice. Researchers have extended those models by relaxing some of their restrictive assumptions. One of the main limitations of the EOQ model is the estimation of its cost parameters, such as setup and holding costs, which include some hidden (or difficult to estimate) components. Emerging research proposes using the second law of thermodynamics when to measure the hidden (entropy) costs of inventory systems. Another research stream focuses on learning-by-doing, which reduces the unit cost of a product, thus reducing its price and enhancing a firm's competitiveness. This paper assumes that a buyer receives a shipment from its vendor following the EOQ model. The buyer invests in the vendor's process to accelerate learning (mainly workers training, among other things). The buyer's unit purchase cost reduces because of learning at the vendor's side. The buyer's competitors also learn, increasing competitiveness. For this purpose, we develop an EOQ model where price-dependent demand is analogous to a heat transfer equation, which is used to determine the entropy cost. It accounts for improvement by learning as a result of the buyer's investment to compete in a market. The implementation and management of improvement programs are not usually smooth, resulting in disorder quantified by an entropy cost function. The developed EOQ model is investigated with and without entropy costs. Numerical results representing different scenarios are provided to illustrate the behavior of the models and identify the factors affecting the decision variables and, subsequently, the buyer's profitability. The results showed that in a competitive market, the buyer has to maintain a learning rate faster than those of its competitors to ensure a prolonged, but indefinite, profitability. The results also showed that investment in learning is meaningful when the competition is fierce.