Application of the newsvendor model with re-ordering opportunity in two-echelon supply chains

In this paper, we extend the application of the single period stochastic inventory model, known as the newsvendor model, to cover lot sizing in two-echelon supply chains where re-ordering opportunities are permitted to the downstream members of the echelon. An analytical model is proposed to determine the optimum lot size for the different echelons of the supply chain in a newsvendor environment. The model with the re-ordering opportunity under a decentralised and under a centralised decision scenarios are developed and compared with reference to the standard model with single-order opportunity. Results show that the re-ordering opportunity reduces the total cost for the chain. Moreover, the analytical results developed for the uniform and exponential demand distributions as well as the numerical experiments performed exhibit that optimising each echelon individually, under the re-ordering opportunity assumption, leads to almost the same cost as considering the entire chain collectively.