Economic selection of process mean and lot-sizing decisions for multi-newsvendor supply chain

Two related problems are integrated in this paper, the first is the targeting problem and another is production/inventory decisions in a supply chain. The supply chain under consideration consists of a supplier of raw material, a single producer, and multiple newsvendors. The producer can adjust the process mean before starting the production run. Once set to a certain target value, the process mean is not changed until the production lot is completed. At the end of a production run, the producer screens the lot and uses specification limits to evaluate the quality of the item. Nonconforming items are scrapped with no salvage value; however, conforming items are delivered to newsvendors who are subjected to random demand. If demand on a newsvendor in a season is lower than anticipated, surplus items will be returned to the producer at a certain transportation cost. We first develop a mathematical model that maximizes the expected total profit of the supply chain. Then, a table for two special functions is devised to simplify the solution method and is used to find the optimal solution of the proposed model. We also study the significance of this integration by comparing the performance of the proposed model with an independent model where the process mean selection and lot‐sizing decisions are found separately.