A thermodynamic approach to modelling the economic order quantity

Ever since its introduction in the second decade of the past century, the economic order quantity (EOQ) model has been the subject of extensive investigations and extensions by academicians. Although the EOQ formula has been widely used and accepted by many industries, some practitioners have questioned its practical application. Accounting for holding and order/set-up costs, as has traditionally been the case for the economic order quantity, can distort the scenario. There are hidden costs not accounted for when modelling inventory systems. This paper postulates that some of these costs, which we refer to as the entropy costs, may be estimated using the principles of thermodynamics. Firstly, a new mathematical model is developed and considered as an enhancement to the EOQ model. Secondly, the developed model is investigated in a two-level (supplier–retailer) supply chain coordination context. Numerical examples are presented and results discussed.