Supply chain management with a mixture of continuous and lumpy demand : the case of the EPQ model -

Abstract

When it comes to inventory management in supply chains, most of the literature considers models with continuous demand, where products are demanded one unit at a time. However some firms experience multiple demand streams. These demand streams might differ in types and rates. Our paper considers a firm adopting the EPQ model under a lumpy demand stream of known magnitude occurring at regular time intervals, together with the conventional uniform demand stream. This can be the case of a manufacturer selling in discrete shipments to downstream retailers and selling directly to customers through an outlet store. We derive expressions for the optimal production quantity and the minimum total cost of the system. The expression of the optimal production quantity is similar to that of the classical EPQ model with the weighted average of the discrete and continuous demand rates replacing the classical uniform demand rates. Furthermore, we present a one-vendor-one buyer supply chain application to investigate the effect of mixed demand streams on the supply chain performance. We demonstrate that smoothing the lumpy demand with continuous demand allow a better match of supply and demand, and increases the benefits of supply chain integration.