Negotiation Model for Optimal Replenishment Planning Considering Defects under the VMI and JIT Environment

Abstract

As the supply chain becomes more complicated and globalized, outsourcing techniques, such as the Vendor Managed Inventory (VMI) under the Just-In-Time (JIT) conditions, are becoming widely adopted, in order to reduce inventory, lead-time and set up costs. For vendors, Third Party Logistics (TPL) is regarded as one of the best alternatives used to improve both their service level and profit. For TPL service providers, their profits must be maximized under economies of scale. However, under the JIT condition, it is very difficult to balance the order quantity whilst satisfying the predefined conditions related to inventory level. In addition, while transporting and keeping items, the exposition to various risk factors is likely. In this paper, we propose the TPL service provider to determine the optimal order quantity, considering defective items under the VMI and JIT conditions. By designing a mathematical decision-making problem based on the EPQ (Economic Production Quantity)/EOQ (Economic Order Quantity) with defective items, we can find the optimal order quantity for TPL service providers under VMI and JIT. With illustrative numerical examples, the procedure and the impacts of the expected defective rates are explained with sensitivity analysis.Copyright © 2019 The Korean Association of Shipping and Logistics, Inc. Production and hosting by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).