DEVELOPING AN INTEGRATED TWO-LAYERED SUPPLY CHAIN MODEL WITH DEFECTS IN PRODUCTION SYSTEM

In real production systems, the process is always bound to the production of faulty items and different approaches may be used for handling these low quality items according to the nature of the industry and product. Repairing, discarding, or selling items in a secondary market are some of the possible actions. We investigated the essentiality of coordinated decision-making between a supplier and a buyer in this environment, hence developing a model to minimize total costs of two parties with an attitude for improving quality of production system. In common two-layered supply chains, the buyer defines the Economic Order Quantity (EOQ) according to its own decision criteria. These order quantities may not favor the supplier and most probably cause an increase in its inventory costs. Joint economic lot sizing strategy has been practiced in the literature to minimize the total cost of the system and an attempt was made to add more real-world variables and coordinated strategies regarding quality to our model. The examination level is assumed to be 100 percent with two types of examination errors. Type I error (defective recognition of good products) and Type II error (good recognition of defective products). All the imperfect items are returned to the supplier at the end of the examination cycle and are replaced by new items by supplier. These imperfect items are then sold in a secondary market with a lower price. Various costs are taken into account regarding the production of faulty items such as excess production costs, returning cost, the loss of credit cost, and the cost of storing faulty items at buyer's warehouse. We also considered an amount of joint investment to be made on enhancing the quality of the production which can definitely favor both parties in the long term. Amount of this investment is a variable in the model.