Abstract

In this paper, the study attempts to determine the optimal capital investment in setup cost reduction and optimal lot sizing policies for an economic order quantity (EOQ) model with random yields. The setup cost is treated as the function of capital expenditure in technology. The study shows that the expected total annual cost functions with capital investment is convex and develop a solution procedure to determine the optimal lot sizes and the capital investment in setup cost reduction with a limited capital budget. Finally, a numerical example is presented to illustrate the results and compared to the results without considering capital investment. These results evidently show that significant costs savings can be obtained through capital investment in setup cost reduction. In addition, the sensitivity analysis is also included.

Key words: Inventory, random yields, lot sizing, investment analysis.