A multi-echelon inventory system with supplier selection and order allocation under stochastic demand

This paper investigates an integrated supplier selection and inventory control problems in supply chain management by developing a mathematical model for a multi-echelon system. In particular, a buyer firm that consists of one warehouse and N identical retailers procures a type of product from a group of potential suppliers, which may have different prices, ordering costs, lead times and have restriction on minimum and maximum total order size, to satisfy stochastic demand. A continuous review system that implements the order quantity, reorder point (Q, R) inventory policy is considered in the proposed model. The objective is to select suppliers and to determine the optimal inventory policy that coordinates stock levels between each echelon of the systems while properly allocating orders among selected suppliers to maximize the expected profit. The model is solved by decomposing the mixed integer nonlinear programming model into two sub-models. Numerical experiments are conducted to evaluate the model and some managerial insights are obtained with sensitivity analysis.