Consignment Stock Policy with Defective Items

Abstract

CS (consignment stock) policy is a kind of joint vendor and buyer policy to the management of inventories in supply chains. In this paper, we develop production-inventory system models of consignment stock to determine optimal integrated vendor buyer inventory policy, taking into account the views of single-buyer and single-vendor based on Hill's (1997) model and Braglia and Zavanella's (2003) models. We consider of defective items' cost and cost of stock as part of the vendor's costs. The objective is to minimize the total joint annual costs incurred by the vendor and the buyer. Delayed deliveries are permitted. The average costs over time are to be minimized. The decisions to take are the delivered amount, the number of transport operations per production batch, the quantity transported per delivery and delayed deliveries. In order to study the policy under uncertain demand, a basic model of consignment stock and a delayed deliveries model are presented, and then the stochastic demand model is given under variable lead-time. For practical purpose, the delivery quantity to the buyer is supposed to be identical at each replenishment. The expected annual integrated total cost function is derived and a solution procedure is established to find out the optimal solution. Finally, the solution technique is illustrated with a numerical example for each model. The novelty of the paper is that defective item costs are included in the CS models and optimal formula is developed under uncertain demand and variable lead-time. Managers can easily apply these models to practice