Yield randomness, cost tradeoffs, and diversification in the EOQ model

Yigal Gerchak · Mahmut Parlar

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Supply Chain and Inventory Management Management and Optimization Techniques Sustainable Supply Chain Management

Abstract

Abstract Existing production/inventory models with random (variable) yield take the yield distribution as given. This work takes a step towards selecting the optimal yield randomness, jointly with lot sizing decisions. First, we analyze an EOQ model where yield variance and lot size are to be selected simultaneously. Two different cost structures are considered. Secondly, we consider source diversification (‘second sourcing’) as a means of reducing effective yield randomness, and trade its benefits against its costs. Conditions for the superiority of diversification between two sources with distinct yield distributions over a single source are derived. The optimal number of identical sources is also analyzed. Some comments on the congruence of the results with recent JIT practices are provided.

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References

1986Economic Production Cycles with Imperfect Production Processes 1985Investing in Reduced Setups in the EOQ Model 1990The Structure of Periodic Review Policies in the Presence of Random Yield 1980Optimal inventory policies when stockouts result from defective products 1990Joint Lot Sizing and Inspection Policy in an EOQ Model with Random Yield 1988Periodic Review Production Models With Variable Yield And Uncertain Demand 1976Establishing The Order Quantity When The Amount Received Is Uncertain

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