Determining the materials procurement policy based on the economic order/production models with backlogging permitted

This paper considers the materials procurement decision-making based on the economic order quantity and economic production quantity models with backlogging permitted. Make-or-buy is one of the fundamental decisions routinely made by most manufacturing firms. Cost is always considered as the biggest determinant in the decision to make or buy. Four terms composing the total inventory cost per unit time are analyzed in this study; they are annual setup cost, purchase/manufacturing cost, holding cost, and backordering cost. The impact of different values of the unit backorder cost b _i , setup cost K _i, and unit cost c _i to the make-or-buy decision is studied specifically in our mathematical analysis. As a result, the guidelines in terms of simplified formulas for the make-or-buy decision makings are derived. Numerical examples are provided to demonstrate their practical usages.