Joe Geunes, Z.-J. Max Shen, H. Edwin Romeijn
Economic ordering decisions with market selection flexibility
This paper takes a different approach to the classical economic order quantity (EOQ)
and economic production quantity (EPQ) problems. Standard approaches to these problems
treat satisfying a predefined demand level as a constraint. In many practical contexts,
however, total demand is comprised of separate demands from different markets or customers.
It is not always clear that constraining a producer to satisfy all markets is an optimal approach.
Since the cost of an item depends on the total demand volume, no easy method exists for
determining a market's (or customer's) profitability a priori, based simply on per unit revenue and cost.
In addition, capacity constraints often limit the seller's ability to meet all market demands.
This paper presents models that address economic ordering decisions when a seller can choose whether
to satisfy multiple markets (or customers). The models generalize the classical EOQ and EPQ problems
and lead to interesting optimization problems with intuitively appealing solution properties and
interesting implications for coordinated inventory and pricing management.