An EOQ model for MRO customers under stochastic price to quantify bullwhip effect for the manufacturer

Sodhi, M., Sodhi, N.S. & Tang, C.S. (2013). An EOQ model for MRO customers under stochastic price to quantify bullwhip effect for the manufacturer. International Journal of Production Economics, 155, pp. 132-142. doi: 10.1016/j.ijpe.2013.12.020

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Abstract

Motivated by a particular multinational cutting-tools manufacturer, we extend the traditional economic order quantity (EOQ) model for maintenance-repair-and-overhaul (MRO) customers under stochastic purchase price and use it to show how price variance leads to bullwhip effect for the MRO manufacturer despite constant consumption by the customer. Our extension of the EOQ model is based on two assumptions that are reasonable for MRO customers: (a) customer consumption rate of the product is constant; and (b) the customer places each order when the inventory level drops to a pre-specified level (say, zero). We determine the customer's optimal ordering quantity in closed form expressions, which enables us to examine the impact of sales price variance on the variance in the orders the customer places on the manufacturer, thus creating a pricing-induced bullwhip effect. We then extend our analysis to multiple products and multiple customer segments and discuss ways for the manufacturer to mitigate the variance in the customer's orders.

Item Type: Article
Additional Information: NOTICE: this is the author’s version of a work that was accepted for publication in International Journal of Production Economics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in International Journal of Production Economics, #155 (2013) 10.1016/j.ijpe.2013.12.020
Uncontrolled Keywords: EOQ model; Stochastic price; Bullwhip effect; Order variance; Transactional pricing; MRO sector; Multiple products; Multiple customer segments
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
Divisions: Cass Business School > Faculty of Management
URI: http://openaccess.city.ac.uk/id/eprint/8674

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