A deterministic two-echelon inventory model with an arbitrary number of lower echelon activities

Abstract

The Economic Order Quantity (EOQ) model is extended to a deterministic, two-echelon model with an arbitrary number of activities on the lower echelon. Two variations of the model are developed using minimization of time-average cost as an objective. A no-stockouts-allowed case is examined, and a method for finding the optimal solution is developed. A backorders-allowed model is derived and partially solved here in general. A full solution is presented for a restricted range of lower echelon parameter values. Examples of the no-stockouts-allowed model are given and solved. The solutions from this model are compared to those derived assuming the activities operate wholly independently. Significant potential reduction in variable time-average cost through the use of this model is demonstrated.