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

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.