The effects of contractual agreements on the economic production quantity model with machine breakdown

This paper develops a production-inventory model which is subject to breakdowns, and studies the influence of outsourcing on the expected total cost and the fill rate in case of any failure in the production facility. To avoid shortages and aim at a higher fill rate when there are random breakdowns, the manufacturer has the option to purchase some quantities from an external supplier while repairing the production facility. In this paper, this transaction is formulated through different settings. First, the manufacturer has the option to purchase the items from an available supplier in the market. The manufacturer is also given the option to procure the required items from a predetermined supplier based on a contractual agreement. These scenarios are then compared with the setting in which the manufacturer keeps safety stock in case of breakdown. The results of this study show that using an external supplier, when the machine is prone to failures, improves the performance of the system. We have also shown that it is more beneficial for the manufacturer to collaborate with an external supplier rather than keep safety stock. The analysis is further elaborated using several numerical experiments.