Inventory management is a topic that has been captured the attention of academic and business communities for long time. Of the most important points that investigated by academicians and practitioners for decades is the selecting of the Economic Order Quantity (EOQ). As the name suggests, EOQ is the order quantity that minimizes total inventory cost. Despite the many variants of the EOQ that have appeared in the literature to fine tune it to reality, it still has limitations. A major one is that it does not take into account the hidden costs inherent in inventory systems. Some of these costs relate to sustainability issues including environmental, social labor, and economic effects. This ...view middle of the document...
2. LITERATURE REVIEW
The classic Economic Order Quantity (EOQ) minimizes the sum of two conflicting inventory costs: ordering (setup) and holding costs. Since its inception, the EOQ model underwent extensive investigation and development to fit various requirements (e.g., Drezner et al., 2013; Muckstadt and Sapra, 2009; Schwaller, 1988; Chen and Min, 1991). Some of the main limitations of the traditional EOQ model is its assumption that all units of a specific product are of a perfect quality and a perfectly steady demand (Khan & Jaber, 2011). Salami & Jaber (2000) modified the classical EOQ model to consider the imperfect quality of products. They showed that the size of the EOQ increases as the average percentage of imperfect quality items increases.
Facing pressures from governments, customers and other stakeholders, business firms have realized that there is a need to adopt better strategies and tools to minimize the negative environmental and social effects that their operations produce, while seeking economic profitability. Boney and Jaber (2011) developed an analytical inventory model, a variation of the EOQ, and concluded that items should be ordered in larger quantities less frequently than the classical EOQ model recommends in order to reduce the transportation cost and, consequently, CO2 emissions.
The novel idea of presenting an analogy between the behavior of production and thermal systems has encouraged some researchers to merge the concepts of the first and second laws of thermodynamics with inventory management. Thermodynamics is a natural science that deals with the conversion of matter and energy from one state to another. It illustrates that increasing energy and matter resource-flows into a given system results in an extensive depletion of these resources, which increases the disorder (entropy) of the system (Node, 1997). This suggests that using the laws of thermodynamics can be used as a tool to protect global resources and achieve more sustainable systems.
Entropy is defined as the degree of disorder in a process or a system that illustrates the amount of unused energy. It “frequently manifests itself as a queue; for example, materials may wait to be processed or a plant is not fully utilized as it waits for materials; machines wait for service or maintenance men wait to service machines; finished goods wait for customers' orders or customers wait for goods, etc.” (Drechsler, 1968).
To reduce the effect of entropy, Jaber et al. (2004) suggested adding a third cost component (entropy) when analyzing production and inventory policies. They found that using the entropy cost approach leads to higher profits than what the classical EOQ model suggests and recommends ordering in larger quantities less frequently. Their results also showed that reducing the lot size without considering entropy cost would have opposite result than expected. Thermodynamically, entropy is related to another property, which is the exergy....