A vendor-buyer integrated model under production uncertainty

Abstract

This paper examines the benefits of supply chain integration for a single-vendor, single-buyer system in which production runs of the vendor are subject to random interruptions and demand at the buyer is continuous, of fixed, known rate. Both the vendor and the buyer consider the fixed setup cost, the variable ordering cost, and the inventory holding cost. The system can be operated under the vendor-led, buyer-led, or integrated mode with the order quantity set to be optimal for any of the modes. In all modes, the vendor schedules production runs to provide the buyer a new batch, possibly a partial batch cut short by a random interruption, right when the buyer runs out of inventory. Supported by theories, the paper conducts sensitivity analysis on the optimal order quantities with respect to system parameters. The numerical experiments also provide insights for the optimal order quantities not covered by the theoretical results.

Keywords:

• Supply chain management
• inventory
• unreliable production systems
• random capacity
• supply chain integration