On the integration of production and distribution: Economic order and production quantity implications

Abstract

Economic Order Quantity (EOQ) and Economic Production Quantity (EPQ) models have been used for well over 50 yr to optimize batch quantities in transportation and production. Traditionally, EOQ and EPQ models have treated production and transportation batch sizes as independent decisions. The objective of this paper is to examine how attributes of the distribution system affect inventory accounting and EOQ/EPQ decisions. The paper develops a range of “characteristic inventory curves” to represent situations encountered in integrated production/ distribution systems. The paper then shows how system attributes define the inventory curve, and the resulting EOQ/EPQ equation. Conclusions include: (1) accounting for inventory at both the origin and destination can yield significantly different EOQ/EPQ results, but relatively modest regret; and (2) failure to account for consolidation effects among multiple products sent to a common destination can lead to substantial errors.