Setup cost reduction in an inventory model with finite-range stochastic lead times

Setup cost reduction in an inventory model with finite-range stochastic lead times

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Article ID: iaor1989862
Country: United Kingdom
Volume: 28
Issue: 1
Start Page Number: 199
End Page Number: 212
Publication Date: Jan 1990
Journal: International Journal of Production Research
Authors: , ,
Abstract:

Traditionally, upon solution, independent demand inventory models result in the determination of a closed form for the economic lot size. Generally, this is obtained from the result that holding costs and setup costs are constant and equal at the optimum. However, the experience of the Japanese indicates that this need not be the case. Specifically, setup cost may be reduced by investing in reduced setup times resulting in smaller lot sizes and increased flexibility. Various authors have investigated the impact of such investment on classical lot sizing formulas which has resulted in the derivation of modified relationships. A common assumption of this research has been that demand and lead time are deterministic. This paper extends this previous work by considering the more realistic case of investing in decreasing setup costs where lead time is stochastic. Closed form relationships for optimal lot size, optimal setup cost, optimal total cost, etc. are derived. Numerical results are presented for cases where lead times follow uniform and normal distributions. Sensitivity analysis is performed to indicate under what conditions investment is warranted.

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