A Joint Economic‐lot‐size Model for Purchaser and Vendor

ABSTRACT In a typical purchasing situation, the issues of price, lot sizing, etc., usually are settled through negotiations between the purchaser and the vendor. Depending on the existing balance of power, the end result of such a bargaining process may be a near‐optimal or optimal ordering policy for one of the parties (placing the other in a position of significant disadvantage) or, sometimes, inoptimal policies for both parties. This paper develops a joint economic‐lot‐size model for a special case where a vendor produces to order for a purchaser on a lot‐for‐lot basis under deterministic conditions. The focus of this model is the joint total relevant cost. It is shown that a jointly optimal ordering policy, together with an appropriate price adjustment, can be beneficial economically for both parties or, at the least, does not place either at a disadvantage.