An exact algorithm for solving the economic lot and supply scheduling problem using a power-of-two policy

It is not sufficient for a manufacturer of products to merely optimize lot sizes and production schedules to reduce company-wide costs. Optimal policies for raw materials purchasing, stock keeping of input material, inventory management of end products and customer demand fulfillment also have to be implemented in an integrated manner. The economic lot and supply scheduling problem (ELSSP) deals with the problem of the simultaneous planning of raw materials purchasing, production planning and storage of finished goods. The underlying assumptions of an ELSSP can be observed in several industrial areas, e.g., the retailing and automotive industries. After a brief problem description and a literature review, this paper presents a complete mathematical model and an exact procedure to solve the ELSSP using a power-of-two policy. The solution procedure is based on the junction point method. Analytical results for a broad range of test instances are calculated comparing the results of a power-of-two policy to the results from applying a common cycle policy. The results emphasize the economic advantages of the power-of-two policy especially for certain parameter values.