VOL. 9, NO. 4, APRIL 2014 ISSN 1819-6608 ARPN Journal of Engineering and Applied Sciences © 2006-2014 Asian Research Publishing Network (ARPN). All rights reserved. www.arpnjournals.com 405 MODELING OF TWO-ECHELON INVENTORY SYSTEM UNDER EXPONENTIAL PRICE DEPENDENT DEMAND Burra Karuna Kumar 1 , D. Nagaraju 2 , S. Narayanan 2 , K. Syam Sundar 1 1 Mechanical Engineering, Gudlavalleru Engineering College, Gudlavalleru, India 2 School of Mechanical & Building Sciences, VIT University, Vellore, India E-Mail: kkburra@yahoo.co.in ABSTRACT In the present day scenario of globalization, the concept of supply chain management (SCM) has gained significance as one of the 21 st century manufacturing paradigms for improving organizational competitiveness. In this context, a two level supply chain model is developed considering a single manufacturer and single retailer. The main objective of this research is to demonstrate the optimality of the decision variables and objective function for respective entities as well as for the entire chain under exponential price dependent demand. The mathematical model is developed in two fold. First, the expression for the total variable cost of the retailer and manufacturer is developed independently and then for the entire supply chain as a function of ordering/set up costs and carrying costs. Numerical example is devised and the computer program is written in MATLAB. The model is solved for optimality of inventory level, number of shipments and the total relevant cost of the individual entities and the entire chain for coordinated and non coordinated supply chain. Also, the sensitivity analysis is carried out. From the research findings, it is evident that with supply chain coordination, the total relevant cost of supply chain decreases. Keywords: supply chain management, exponential price dependant demand, total relevant cost, competitive strategy. INTRODUCTION The initiatives of liberalization, privatization, and globalization paved ways to great number of opportunities coupled with complex challenges. Globalization of market, increased competition, reducing gap between products in terms of quality and performance are compelling the academicians and industry to rethink about how to manage business operations more efficiently and effectively. Supply chain management (SCM) presents significant opportunities for improving margins and reducing cost. Inventory is a major source of cost in a supply chain and has a very large impact on responsiveness. The location and quantity of inventory can move the supply chain from one end of the responsiveness spectrum to the other. Actions are needed to lower the amount of inventory needed without increasing cost or reducing responsiveness. Inventory usually represents from 20 to 60% of the total assets of the manufacturing firms. Inventory management policies are very critical in determining the profit of the firms (Arnold, 1998). Multi echelon inventory management is a major issue in SCM, i.e., an approach that addresses supply chain issues under an integrated perspective (Routroy, and Giannoccaro et al.). The trade-off implicit in the inventory driver is between the responsiveness that results from more inventory and efficiency that results from less inventory. Hence, a competitive strategy is desired. Actions taken by one member of the chain can influence the profitability of all others in the chain. Firms are thinking to compete as a part of supply chain against other supply chains, rather than as a single firm against other individual firms. Supply chain coordination improves, if all stages of the chain take actions that together increase total supply chain profits. Supply chain coordination requires each stage of the supply chain to take into account the impact of its actions on other stages. Lack of coordination leads to a degradation of responsiveness and an increase in the cost of a supply chain. Malone and Crowston (1994) presented “The act of managing dependencies between entities and the joint effort of entities working together towards mutually defined goals” as the most commonly accepted definition of coordination in the literature. Weng (1995) presented a model for analyzing the impact of Joint decision policies on channel coordination in a system consisting of a supplier and group of homogeneous buyers. Furthermore, it is a fact that the holding costs of each echelon are dependent on the price of the material at that echelon and the cumulative costs, which influences the final price of the item to the customer. Hence, the competitiveness of the supply chain depends significantly on the price and there by demand. At the same instant, firms have to concentrate on effective utilization of the working capital, which is the source to be invested for inventories. So, while making strategic managerial decision, the study of supply chain coordination mechanism under price dependant environment becomes worthwhile. In this paper, two-echelon inventory system is modeled under exponential price dependant demand. The organization of this paper is made into six sections. Literature is reviewed in Section-2. In Section-3, a mathematical model is developed. Numerical investigation is presented in Section-4 along with results and discussions. Section-5 provides conclusions and future scope. References are presented in Section-6. LITERATURE REVIEW A brief review of literature pertaining to supply chain coordination is presented in this section. Several