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Evaluating supply chain flexibility with order quantity constraints and lost sales

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  • Erhan Kesen, Saadettin
  • Kanchanapiboon, Atipol
  • Das, Sanchoy K.

Abstract

In a flexible supply chain buyers and suppliers are willing to accommodate the uncertainties and variations in each other's businesses. In many instances the buyer may prefer to use supply flexibility, as opposed to an inventory holding strategy, to counter demand uncertainty. We consider the case where the buyer releases a fixed period replenishment order to the supplier under a supply contract defined by three parameters: (i) supply price per unit (ii) minimum order quantity and (iii) order quantity reduction penalty. Following a demand drop the buyer therefore has two flexibility options in the order cycle: (i) to place an order less than the supplier specified minimum order quantity and pay the associated penalty, or (ii) place no order and lose the sales for the current period. There is no penalty for not placing an order. A key buyer decision then is Qlost, the order or replenishment quantity level below which no order is placed and the sales are lost. A model for deriving the expected supply and lost sales cost as a function of Qlost is presented, and it is shown that the optimal value of Qlost is the inflexion point of the lost sales cost and the quantity penalty. The model is then used to select the supplier that minimizes the procurement plus lost sales costs from a given set of supply bids and a known expected customer demand behavior. Finally, the buyer also has the option to make capital investments in the supplier so as to reduce the minimum order quantity and hence reduce the projected supply costs. We evaluate the economics of this tactic.

Suggested Citation

  • Erhan Kesen, Saadettin & Kanchanapiboon, Atipol & Das, Sanchoy K., 2010. "Evaluating supply chain flexibility with order quantity constraints and lost sales," International Journal of Production Economics, Elsevier, vol. 126(2), pages 181-188, August.
  • Handle: RePEc:eee:proeco:v:126:y:2010:i:2:p:181-188
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    1. Cai, Wenbo & Abdel-Malek, Layek & Hoseini, Babak & Rajaei Dehkordi, Sharareh, 2015. "Impact of flexible contracts on the performance of both retailer and supplier," International Journal of Production Economics, Elsevier, vol. 170(PB), pages 429-444.
    2. Li, Xin & Lian, Zhaotong & Choong, Kwee Keong & Liu, Xiaoming, 2016. "A quantity-flexibility contract with coordination," International Journal of Production Economics, Elsevier, vol. 179(C), pages 273-284.
    3. George Varlas & Michael Vidalis & Stelios Koukoumialos & Alexandros Diamantidis, 2021. "Optimal inventory control policies of a two-stage push–pull production inventory system with lost sales under stochastic production, transportation, and external demand," TOP: An Official Journal of the Spanish Society of Statistics and Operations Research, Springer;Sociedad de Estadística e Investigación Operativa, vol. 29(3), pages 799-832, October.
    4. Han Zhu, 2022. "A simple heuristic policy for stochastic inventory systems with both minimum and maximum order quantity requirements," Annals of Operations Research, Springer, vol. 309(1), pages 347-363, February.
    5. Durango-Cohen, Elizabeth J. & Li, Chia Hang, 2017. "Modeling supplier capacity allocation decisions," International Journal of Production Economics, Elsevier, vol. 184(C), pages 256-272.
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    7. Fan, Chin-Yuan & Fan, Pei-Shu & Chang, Pei-Chann, 2010. "A system dynamics modeling approach for a military weapon maintenance supply system," International Journal of Production Economics, Elsevier, vol. 128(2), pages 457-469, December.
    8. Enrique, Daisy Valle & Lerman, Laura Visintainer & Sousa, Paulo Renato de & Benitez, Guilherme Brittes & Bigares Charrua Santos, Fernando M. & Frank, Alejandro G., 2022. "Being digital and flexible to navigate the storm: How digital transformation enhances supply chain flexibility in turbulent environments," International Journal of Production Economics, Elsevier, vol. 250(C).
    9. Santanu Mandal, 2016. "Towards An Integrated Logistics Capabilities Model Of Supply Chain Flexibility: A Social Exchange Perspective," Romanian Economic Business Review, Romanian-American University, vol. 11(3), pages 44-67, September.
    10. Lin, Rong-Ho, 2012. "An integrated model for supplier selection under a fuzzy situation," International Journal of Production Economics, Elsevier, vol. 138(1), pages 55-61.
    11. Pereira, Daniel Filipe & Oliveira, José Fernando & Carravilla, Maria Antónia, 2023. "Design of a sales plan in a hybrid contractual and non-contractual context in a setting of limited capacity: A robust approach," International Journal of Production Economics, Elsevier, vol. 260(C).
    12. Saghiri, Soroosh S. & Barnes, Stuart J., 2016. "Supplier flexibility and postponement implementation: An empirical analysis," International Journal of Production Economics, Elsevier, vol. 173(C), pages 170-183.
    13. Seebacher, Gottfried & Winkler, Herwig, 2015. "A capability approach to evaluate supply chain flexibility," International Journal of Production Economics, Elsevier, vol. 167(C), pages 177-186.
    14. Thomé, Antonio Márcio T. & Scavarda, Luiz Felipe & Pires, Sílvio R.I. & Ceryno, Paula & Klingebiel, Katja, 2014. "A multi-tier study on supply chain flexibility in the automotive industry," International Journal of Production Economics, Elsevier, vol. 158(C), pages 91-105.
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