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Yield randomness, cost tradeoffs, and diversification in the EOQ model
Author(s) -
Gerchak Yigal,
Parlar Mahmut
Publication year - 1990
Publication title -
naval research logistics (nrl)
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.665
H-Index - 68
eISSN - 1520-6750
pISSN - 0894-069X
DOI - 10.1002/nav.3800370301
Subject(s) - randomness , economic order quantity , diversification (marketing strategy) , yield (engineering) , sizing , mathematical optimization , variance (accounting) , production (economics) , econometrics , computer science , mathematics , economics , statistics , microeconomics , business , art , supply chain , materials science , accounting , marketing , visual arts , metallurgy
Existing production/inventory models with random (variable) yield take the yield distribution as given. This work takes a step towards selecting the optimal yield randomness, jointly with lot sizing decisions. First, we analyze an EOQ model where yield variance and lot size are to be selected simultaneously. Two different cost structures are considered. Secondly, we consider source diversification (‘second sourcing’) as a means of reducing effective yield randomness, and trade its benefits against its costs. Conditions for the superiority of diversification between two sources with distinct yield distributions over a single source are derived. The optimal number of identical sources is also analyzed. Some comments on the congruence of the results with recent JIT practices are provided.