In this paper, we consider three–stage inventory production system in three–layer supply chain with
equal–sized shipments and incorporating raw material procurement. The vendor converts raw
material, which is ordered from supplier, to finished product and delivers it to the buyer. We assume
that the demand in buyer's side is stochastic and shortage is allowed. The objective is to minimise
the expected total cost incurred by the vendor and the buyer. We derive expected total joint cost
function and propose solution procedure to determine the optimal policy. Finally, we present
numerical examples to illustrate the significance of cost reduction of the integrated model in
comparison with independent model
