An integrated multi‐stage supply chain inventory model under an infinite planning horizon and continuous price decrease

This paper studies an integrated inventory model in a supply chain that involves procurement, production and delivery activities. The model is studied in an environment where products experience continuous price decrease and planning is performed in an infinite time horizon. In this model, a manufacturing facility purchases a fixed‐quantity of raw materials from an outside supplier, processes the materials, and delivers a fixed‐quantity of finished products to a customer periodically. In order to take advantage of the decreasing price trend, customers demand frequent deliveries of small lots of finished products, and this inventory management strategy has been used by many successful companies in technology‐related industries. Therefore, the ultimate intention of this research is to study and model the inventory system for high‐tech companies whose products are experiencing continuous price decrease. This model is used to determine an optimal economic lot size model for raw material procurement, production setup and finished goods delivering under an infinite planning horizon. Two efficient algorithms are developed in this paper to solve this nonlinear model and the test results consistently indicate that ordering of raw materials and delivery of finished goods should be frequent in small lots for low ordering and shipment costs. Finally an operational schedule is provided to show the implementation procedure of the model.