Optimal Design of Process-Inventory Network Considering Backordering Costs

Abstract

Product shortage which causes backordering and/or lost sales cost is very popular in chemical industries, especially in commodity polymer business. This study deals with backordering cost in the supply chain optimization model under the framework of process-inventory network. Classical economic order quantity model with backordering cost suggested optimal time delay and lot size of the final product delivery. Backordering can be compensated by advancing production/transportation of it or purchasing substitute product from third party as well as product delivery delay in supply chain network. Optimal solutions considering all means to recover shortage are more complicated than the classical one. We found three different solutions depending on parametric range and variable bounds. Optimal capacity of production/transportation processes associated with the product in backordering can be different from that when the product is not in backordering. The product shipping cycle time computed in this study was smaller than that optimized by the classical EOQ model.