An economic production quantity (EPQ) model for a customer‐dominated supply chain with defective items, reworking and scrap

This paper investigates the production‐inventory policy for a manufacturer operating in a supply chain environment where the manufacturer is not the chain leader. The chain leader dictates the size and the interval of the shipments. Large penalties set by the chain leader on short shipments preclude the permission of shortages. This might require the manufacturer to produce in larger, non‐optimal lots to ensure that all orders are fulfilled as agreed upon with the chain leader. Larger lots, however, subjugate the manufacturer to the risk of an imperfect production process and reworks. A new mathematical model is developed that describes this situation and numerical results are discussed.