A two-echelon single-period inventory control problem under budget constraint

This paper points out an application of the “two-echelon single-period product (newsboy) problem,” in which within a limited budget the final product and the raw materials are purchased before the start of the selling period and depending on the demand, the raw materials may be transformed into the finished product during the period. The objective of this problem is to find the order quantities of both the raw materials and the final product at the beginning of the period such that the expected profit is maximized. A new model is first developed for this problem and then a Lagrangian method is proposed to solve it. Finally, a numerical example is given to illustrate the application of the proposed methodology.

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