Two-echelon supply chain inventory model with controllable lead time and service level constraint

Abstract

This paper considers a two-echelon supply chain inventory problem consisting of a single-vendor and a single-buyer. In the system under study, a vendor produces a product in a batch production environment and supplies it to a buyer facing a stochastic demand, which is assumed to be normally distributed. Also, buyer’s lead time is controllable which can be shortened at an added cost and all shortages are backordered. A model has been formulated for an integrated vendor–buyer problem to jointly determine the optimal order quantity, lead time and the number of shipments from the vendor to the buyer during a production cycle while minimizing the total expected cost of the vendor–buyer integrated system. It is often difficult to estimate the shortage cost in inventory systems. Therefore, instead of having a shortage cost term in the objective function, a service level constraint (SLC) is included in the model that requires a certain proportion of demands to be met in each cycle. An efficient procedure has been suggested to find the bounds on number of shipments and then, an algorithm is developed to obtain the optimal solution of the proposed model. A numerical example is included to illustrate the algorithmic procedure and the effects of key parameters are studied to analyze the behavior of the model. Finally, the savings of buyer and vendor are investigated from implementation of joint optimization model over the model in which they minimize their own cost independently.