Revisiting the two-stage EOQ/EPQ model with inelastic demand: decentralisation and coordination

Abstract

Two-stage operations models serve as a basic unit of analysis for understanding economic trade-offs and conflicting incentives among supply chain partners. We discuss the evolution of such buyer–supplier inventory control models based on the economic order quantity model during the past four decades. In particular, we focus on coordination factors that come into play when the two stages are managed by separate parties based on local incentives. Within this model setting, we characterise conditions under which channel coordination can be achieved using a simple mechanism that does not require costly interaction or negotiation between the two parties. The associated mechanism uses a simple wholesale price with the possible addition of a minimum order quantity (or, alternatively, an associated quantity discount structure). This analysis highlights the key structural drivers that lead to tension between the supplier’s and buyer’s operations preferences and applies a simple approach for mitigating this tension.

Keywords:

• supply chain coordination
• inventory management
• inventory control
• lot sizing
• supply chain management

Notes

No potential conflict of interest was reported by the author.

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2 This article also appeared on the 55th anniversary list of International Journal of Production Research articles cited at least 55 times in Scopus.

3 See Footnote 2.

4 This occurs because the buyer’s inventory holding cost typically exceeds that of the supplier, while fixed costs are often higher at upstream supply chain stages.

5 The average annual echelon holding cost at a stage equals the holding cost at the stage in excess of that at the immediate predecessor stage, multiplied by the average inventory at the stage and at all downstream stages. Thus, the supplier’s echelon holding cost equals the supplier’s holding cost multiplied by the average total inventory at the buyer and supplier, while the buyer’s echelon inventory cost equals the buyer’s holding cost minus the supplier’s, multiplied by the buyer’s average inventory level.

6 By a true cost we mean any cost that is not transferred between the two members within the supply chain model.