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An algorithm for the determination of the economic order quantity in a two-level supply chain with transportation costs: Comparison of decentralized with centralized decision

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Abstract

This paper considers a two-level supply chain consisting of one warehouse and one retailer. In this model we determine the optimal ordering policy according to inventory and transportation costs. We assume that the demand rate by the retailer is known. Shortages are allowed neither at the retailer nor at the warehouse. We study this model in two cases; decentralized and centralized. In the decentralized case the retailer and the warehouse independently minimize their own costs; while in the centralized case the warehouse and the retailer are considered as a whole firm. We propose an algorithm to find economic order quantities for both the retailer and the warehouse which minimize the total system cost in the centralized case. The total system cost contains the holding and ordering costs at the retailer and the warehouse as well as the transportation cost from the warehouse to the retailer. The application of this model into the pharmaceutical downstream supply chain of a public hospital allows obtaining significant savings. By numerical examples, the costs are computed in MATLAB© to compare the costs in the centralized case with decentralized one and to propose a saving-sharing mechanism through quantity discount.

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Authors and Affiliations

  1. Laboratoire LIESP, INSA de Lyon, 19 avenue Jean Capelle, 69621, Villeurbanne Cedex, France

    Armand Baboli

  2. Department of Industrial Engineering, Sharif University of Technology, Azadi Av., Tehran, Iran

    Mohammadali Pirayesh Neghab & Rasoul Haji

Authors
  1. Armand Baboli
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  2. Mohammadali Pirayesh Neghab
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  3. Rasoul Haji
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Correspondence to Armand Baboli.

Additional information

The original version was presented on ICSSSM’06.

Armand Baboli is currently an Associate Professor in the Industrial Engineering Department of the National Institute of Applied Sciences (INSA) of Lyon, France, and member of LIESP laboratory. He received his B.Sc. degree in Industrial Engineering from Iran University of Science & Technology in 1988. In 1994 he received his M.Sc. degree in Industrial Engineering and then in 1999 his Ph.D. degree in Industrial Engineering both from Grenoble Polytechnic National Institute (INPG). His current research interests include supply chain design and organization, inventory management and facility layout planning.

Mohammadali Pirayesh Neghab received his B.Sc. & M.Sc. degrees in Industrial Engineering from Sharif University of Technology, Tehran, Iran, in 2000 and 2002, respectively. Currently he is a Ph.D. candidate in the Industrial Engineering Department of Sharif University. His Ph.D. thesis is in the area of inventory control and supply chain management.

Rasoul Haji is currently a professor of Industrial Engineering at Sharif University of Technology in Tehran, Iran. He received a B.Sc. degree from University of Tehran in Chemical Engineering in 1964. He also earned an M.Sc. degree from University of California-Berkeley in Industrial Engineering in 1967. In 1970 he received his Ph.D. degree from Berkeley in Industrial Engineering. He is the Editor-in-Chief of the Journal of Industrial and Systems Engineering and he is a member of Iran’s Academy of Sciences. He is recognized as a co-founder of a fundamental and important relation in queuing theory known as “Distributional Little’s Law” His research interest includes inventory control, stochastic processes, and queuing theory. He has published papers in different technical journals such as Journal of Applied Probability, SIAM Journal of Applied Math, European Journal of Operations research, Computers and Industrial Engineering, Journal of Production Planning and Control, and Applied Mathematics and Computation.

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Baboli, A., Neghab, M.P. & Haji, R. An algorithm for the determination of the economic order quantity in a two-level supply chain with transportation costs: Comparison of decentralized with centralized decision. J. Syst. Sci. Syst. Eng. 17, 353–366 (2008). https://doi.org/10.1007/s11518-008-5080-z

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  • DOI: https://doi.org/10.1007/s11518-008-5080-z

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