Effects of Hospital’s Space Limitation and Holding Cost on Supplier’s Lot-Sizing Decisions under Consignment Policy

The consignment stock policy is an innovative approach to manage inventories in which the vendor places goods at a buyer’s location without receiving payment until after the goods are used or sold. In the consignment policy, warehouse space is provided by the buyer for the supplier to stock, thus allowing the supplier generous savings in inventory holding costs; on the other hand, the buyer can enjoy a more flexible cash management in procurement. However, the suppliers tend to store as much goods as possible at the buyers sites and on the contrary, the buyers will tend to keep the inventory level just merely to satisfy the customers’ demands to avoid stock-outs and cost of maintaining the warehouse. This issue creates the warehouse space limitation problem in consignment stocking policy. In addition, the integrated inventory models in general assume that the buyers have smaller holding costs than the suppliers’, but this is not true as when the buyer is a hospital, it might cost the buyer much more to stock the expensive medical material in warehouse. At Chang Gung Memorial Hospital, consignment purchasing programs are being implemented for years on some of the specialized medical materials used in surgeries. The consignors (suppliers) joining the agreements are also the manufacturers. The fact that the hospital is experiencing consignors’ inquiries for better implementation motivates this research. As the unit holding cost at the buyer (hospital) side is not accessible, this project is accordingly modified to investigate how the vendor’s limited warehouse capacity influences the supplier’s lot-sizing decisions under the assumption that unit holding cost increases as the supply chain moves downstream to the buyer, or the hospital. In this project, we consider a single-manufacturer, single-buyer supply chain where a manufacturer produces a single item product and periodically delivers it to the buyer on the basis of a consignment policy. An integrated inventory control model, subject to consignor’s warehouse space capacity constraint, is to be constructed to minimize the total cost of the joint economic lot-sizing model. Results from this project might facilitate both the buyer’s and supplier’s decision-making in their consignment agreements.

Project ID:PB10308-3448
External Project ID:MOST103-2221-E182-030