Discrete-event simulation to analyse the impacts of a reduced minimum order quantity in the food industry: proposing a shared-savings contract

Abstract

Retail partners of the food processing industry benefit from lower minimum order quantities, as they are more responsive to changing market conditions and reduce inventory costs. However, production systems in the food processing industry focus on economies of scale by producing large volumes. A shared-savings contract helps to find a trade-off between the two parties, where the retailer shares a part of the cost savings with the manufacturer to cope with higher production costs. We propose a generic data-driven discrete-event simulation model to guide decision-making in the development of a shared-savings contract. Thereby, we examined breakdown and rework behaviours after setups with a Big Data analysis and a correlation analysis. We aim to evaluate the cost development at a cheese processing company, resulting from a reduced minimum order quantity. Our findings revealed that production costs significantly increase with higher breakdowns, setups, and rework. A 20% increase in orders, resulting from a reduced minimum order quantity, requires an additional production capacity of 3%. To conclude, transparent information sharing is key to developing a shared-savings contract in the food supply chain.