Information and Management Sciences Volume 11, Number 3, pp.

81-94, 2000

Q r

Inventory Model with Variable Lead Time When the Amount Received is Uncertain
)
Kun-Shan Wu

Aletheia University R.O.C.

Abstract
This paper presents a mixed inventory model with variable lead time when the amount received is uncertain, in which the order quantity, reorder point and lead time are decision variables. Two models are considered: in the rst model, the normal lead time demand follows normal distribution, and in the second modle, it is distributed free. For both cases, we develop e ective procedures for nding the optimal solution. Furthermore, the e ects of parameters are also included.
Keywords:

Inventory Model, Lead Time, Distribution Free

1. Introduction
Lead time plays an important role and has been a topic of interest for many authors in inventory management (see, for example, Das 2], Foote et al. 3] and Magson 8]). In most of the early literatures dealing with inventory problems, either in deterministic or probabilistic model, lead time is viewed as a prescribed constant or a stochastic variable, which therefore, is not subject to control (see, for example, Naddor 11] and Silver and Peterson 18]). In fact, lead time usually consists of the following components: order preparation, order transit, supplier lead time, delivery time, and setup time (Tersine 9]). In many practical situations, lead time can be reduced at an added crashing cost in other words, it is controllable. By shortening the lead time, we can lower the safety stock, reduce the loss caused by stockout, improve the service level to the customer, and increase the competitive ability in business. Recently, there developed some models which considered lead time as a decision variable. Liao and Shyu 7] initiated a study on lead time reduction by presenting an inventory model in which lead time is a decision variable and the order quantity is predetermined. Ben-Daya and Raouf 1] developed a model that considered both lead time
Received November 1999 Revised and Accepted February 2000.

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and order quantity as decision variables. Later, Ouyang et al. 12] and Ouyang and Wu 13-15] generalized the Ben-Daya and Raouf 1] model by considering shortages in which the lead time demand is considered a normal distribution or distribution free. Later, Moon and Choi 10], Hargia and Ben-Daya 5] extended the Ouyang et al. 12] model to relax the assumption of a given service level and treat the reorder point as a decision varible. Recently, Ouyang and Chuang 16] considered a mixture inventory model with backorders and lost sales, and the backorder rate is a random variable. It also investigates the e ect of quantity discounts on the inventory model. However, all models previously mentioned have assumed that the quantity received is the same as the quantity ordered. The quantity received may not match the quantity ordered due to various reasons such as rejection during inspection, damage or breakage during transportation, etc. Silver 17] extended the simple Wilson lot-size model including the case when the quantity received is not necessary equal to the quantity ordered. Two separate cases were considered to account for the variability in the quantity received. Karlo and Gohil 6] extended Silver's model by allowing shortages when the amount received is uncertain. Gor and Shah 4] developed a lot-size model for deteriorating items by allowing shortages. Warrier and Shah 20] presented a lot-size model with partial backordering and partial lost sales when the quantity received is uncertain and units in the inventory are subject to deterioration at a constant rate. The purpose of this paper is to present the continuous review inventory model with a mixture of backorders and lost sales for variable lead time when the amount received is uncertain, and to nd the optimal ordering strategy. This paper is organized as follows: In Section 2, we shall present the model assumptions and notations. Section 3, a mixed inventory model with variable lead time when the amount received is uncertain is developed. Distribution free procedure is also incorporated in mixed inventory model in Section 4. Section 5 summarizes the paper and contains some concluding remarks.

2. Notations and Assumptions

In this paper, we present an inventory model with a mixture of backorders and lost sales for variable lead time when the amount received is uncertain. The objective of the model is to determine the optimal order quantity, optimal reorder point and optimal lead time that minimize the expected annual total relevant cost. The model is developed using the following notations and assumptions.

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2.1. Notations
D = average demand per year A = xed ordering cost per order h = inventory holding cost per item per year

= 0= = r= Q= L= X=

fX (x) = Y= E( ) = E2( ) = x+ =

xed penalty cost per unit short marginal pro t per unit fraction of the demand backordered during the stockout period, 0 1 reorder point (a decision variable) order quantity (a decision variable) length of lead time (a decision variable) p the lead time demand with nite mean DL and standard deviation L, where is the standard deviation per unit time demand the probability distribution function (p.d.f.) of random variable X the quantity received, a random variable expected value E ( )]2 maximum value of x and 0, i.e., x+ = maxfx 0g

2.2. Assumptions
(1) The reorder point r =expected demand during lead time + safety stock (SS ), and p SS = k. (standard deviation of lead time demand), i.e., r = DL + k L where k is the safety factor. (2) Inventory is continuously reviewed. Replenishments are made whenever the inventory level falls to the reorder point r. (3) The lead time L and n mutually independent components. The ith component has a minimum duration ai and normal duration bi , and a crashing cost per unit time ci . Furthermore, we assume that c1 c2 cn. (4) The components of lead time are crashed one at a time starting with the component of least ci and so on. P (5) If we let L0 = n=1 bj and Li be the length of lead time with components 1 2 : : : i j P crashed to their minimum duration, then Li can be expressed as Li = n=1 bj ; j Pi j =1 (bj ; aj ), i = 1 2 : : : n and hence the lead time crashing cost R(L) per cycle

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for a given L 2 Li Li;1 ], is given by

R(L) = ci(Li;1 ; L) +

i;1 X j =1

cj (bj ; aj )

3. Model Development
In this study, the quantity received is uncertain and depends on the quantity ordered. If a quantity Q is ordered each time, the expected quantity received will be E (Y jQ) = Q, where is the bias factor (0 1 when the expected quantity received is less than or equal to the order quantity, as is the usual case). When the expected quantity received is greater than the order quantity due to various reasons such as counting errors, good production runs, etc., leading to large amount of inventory, > 1. The variance of the quantity received is given by Var (Y jQ) =
2 2 2 0 + 1Q

(1)

2 2 2 where 0 and 1 are non-negative constant. If 1 = 0, then the standard deviation of 2 the quantity received is independent of the quantity ordered and if 0 = 0, then the standard deviation of the quantity received is proportional to the quantity ordered. Under the assumptions described above, the total cost per cycle with a variable lead time can be obtained as Moon and Choi (1998) (or Hariga and Ben-Daya (1999)) given that Y units are received is i Yh C (Y r L) = A + h D Y + r ; DL + (1 ; )E (X ; r)+ + E (X ; r)+ + R(L) (2) 2

where E (X ; r)+ is the expected number of shortages per cycle and = + (1 ; ) 0 : Therefore, the expected total cost per cycle with variable lead time when the amount received is uncertain is
i Qh E C (Y r L)jQ] = A + h D r ; DL + (1 ; )E (X ; r)+ 2 2 + 2h 0 + ( 1 + 2 )Q2 ] + E (X ; r)+ + R(L) D

(3)

Moreover, the expected cycle time is

E (Y jQ) = Q D D

(4)

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The expected annual total cost with variable lead time when the amount received is uncertain, denoted by EAC (Q r L), is then given by E C (Y r L)jQ] divided by E (Y jQ)=D. Using equations (3) and (4), we have

EAC (Q r L) = AD + h r ; DL + (1 ; )E (X ; r)+] + 2 hQ Q + D E (X ; r)+ + R(L)D Q Q

2 2 2 2 0 + ( 1 + )Q ]

(5)

3.1. Normal distribution model

In this subsection, we assume that the lead time demand X has a normal p.d.f. fX (x) p p with mean DL and standard deviation L. Since r = DL + k L, we can also consider the safety factor k as a decision variable instead of r. Hence, the expected demand short p R at end of the cycle is given by E (X ; r)+ = r1 (x ; r)fx (x)dx = L (k) , where (k) (k) ; k 1 ; (k)], and , denote the standard normal density and distribution function respectively. Therefore, the model (5) is reduced to

p p 2 2 EAC (Q k L) = AD + h k L + (1 ; ) L (k)] + 2 hQ 0 + ( 1 + 2 )Q2 ] Q p + D L (k) + R(L)D (6) Q Q For xed Q and k, EAC (Q k L) is a concave function of L Li Li;1 ], because @EAC (Q k L) = hh ;1 k L ;23 ; 1 (1 ; ) L ;23 (k)i ; 1 D L ;23 (k) < 0 @L2 4 4 4 Q Hence, for xed (Q k), the minimum expected annual total cost will occur at the end point of the interval Li Li;1 ]. On the other hand, it can be easy shown that, for a given value of L Li Li;1 ], EAC (Q k L) is a convex function of (Q k). Therefore, for xed L Li Li;1 ], the minimum value of EAC (Q k L) will occur at the point (Q k) that
satis es
2 @EAC (Q k L) = 0 = ;AD ; h 0 + h ( 2 + 2) ; D pL (k) ; R(L)D (7) @Q Q2 2 Q2 2 1 Q Q2

and

@EAC (Q k L) = 0 = h pL ; h(1 ; ) pLP (k) ; D pLP (k) z z @k Q where Pz (k) P (Z > k), and Z is the standard normal random variable.

(8)

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Solving (7) and (8) for Q and Pz (k) respectively, we obtain

v u h 2 u Q = t 2D A + 2D 0 + 2 h( 1 + 2 )

p L (k) + R(L)]

(9)

and

Pz (k) = h(1 ; h) Q + D Q

(10)

2 2 Note that when 0 = 1 = 0 and = 1 (i.e., the quantity received is equal to the quantity ordered), equations (9) and (10) can be reduced as the optimal solution for the model of Moon and Choi 10]. Next, the explicit general solution for Q and k are not possible because the evaluation of each of the equations (9) and (10) requires a knowledge of the value of the other. Consequence, we must establish the following iterative algorithm to nd the optimal (Q k L).

Step 1. For each Li i = 0 1 : : : n preform (i) to (v). (i) Start with ki1 = 0 and get (ki1 ) = 0:3989 by checking the table from Silver and Peterson 18]. (ii) By substituting the value (ki1 ) into (9), to evaluate Qi1 . (iii) By using Qi1 , determine Pz (ki2 ) from (10). (iv) By checking Pz (ki2 ) from Silver and Peterson 18], nd ki2 and (ki2 ). (v) Repeat (ii) to (iv) until no changes occurs in the values of Qi and ki . Step 2. For each (Qi ki Li ), compute the corresponding expected annual total cost EAC (Qi ki Li) i = 0 1 : : : n. Step 3. Find mini=0 1 ::: n EAC (Qi ki Li ). If EAC (Q k L ) = mini=0 1 ::: n EAC (Qi ki Li ), then (Q k L ) is the opp timal solution. And hence, the optimal reorder point r = DL + k L . an inventory system with the following data used in Ouyang et al. 12]: D = 600 units/year, A = $200 per order, h = $20, = $50, 0 = $150, = 11:5 units/week, 2 2 = 7 units/week, except we put 0 = 100, 1 = 0:1 and = 0:9. The lead time has three components with data shown in Table 1.

Algorithm 1

Example 1. In order to illustrate the proceeding solution procedure, we consider

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Table 1. Lead time data

Lead time Normal duration Minimum duration Unit crashing cost component i bi(days) ai(days) ci($/day) 1 20 6 0.4 2 20 6 1.2 3 16 9 5.6 We assume that the lead time demand follows a normal distribution. Applying the proposed Algorithm 1 procedure yields the results shown in Table 2 for = 0 0:5 0:8 and 1. From Table 2, the optimal inventory policy can be found by comparing EAC (Qi ri Li ) for i = 0 1 2 3, and a summary is presented in Table 3.

Table 2. Results of the optimal procedure(Li in week)

0.0 8 6 4 3 0.5 8 6 4 3 0.8 8 6 4 3 1.0 8 6 4 3

Li R(Li) Qi ri EAC (Qi ri Li)

0 5.6 22.4 57.4 0 5.6 22.4 57.4 0 5.6 22.4 57.4 0 5.6 22.4 57.4 273 273 275 279 274 274 275 279 274 274 275 279 275 275 276 279 119 93 67 53 114 89 63 50 109 85 60 47 103 80 56 43 3983.09 3866.21 3770.59 3797.55 3897.96 3793.67 3706.26 3738.96 3782.96 3694.07 3622.43 3668.53 3622.77 3556.53 3511.06 3564.04

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Table 3. Summary of the results of the optimal procedure(Li in week)

0.0 0.5 0.8 1.0

4 4 4 4

275 275 275 276

67 63 60 56

EAC (Q r L )
3770.59 3703.26 3622.43 3511.06

3.2. Distribution free model

In this subsection, we consider the distribution free approach. We relax the restrict about the form of the probability distribution function of lead time demand, i.e., we only assume here that the p.d.f.fx of the lead time demand X has known nite mean DL and p standard deviation L but make no assumption on the probability distribution form of fx. Now, we try to use a minimax distribution free procedure to solve this problem. The minimax approach for this model is to nd the most unfavorable p.d.f.fx in F (which is p a class of fx with mean DL and standard deviation L) for each (Q r L) and then to minimize the expected annual total cost over (Q r L). That is, our problem is to solve:
Q>0 r>0 L>0 fx F

min

max EAC (Q r L)

(11)

To this end, we need the following proposition that was asserted by Moon and Gallego 9].

Proposition 1. For any fx F ,

1 E (X ; r)+ 2

2 L + (r ; DL)2 ; (r ; DL)

(12)

Moreover, the upper bound (12) is tight. p Because r ; DL = k L and for any p.d.f.fx of the lead time demand X , the above inequality always holds. Then, using Proposition 1, our problem is to minimize the cost function for the worst distribution p 1 p p 2 2 EAC u(Q k L) = AD + h k L + 2 (1 ; ) L( 1 + k2 ; k)]+ 2 hQ 0 +( 1 + 2)Q2 ] Q p p (13) + 1 D L( 1 + k2 ; k) + R(L)D 2 Q Q where EAC u (Q k L) is the least upper bound of EAC (Q k L).

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As discussed in the previous subsection (3.1), we can show that EAC (Q k L) is a concave function of L Li Li;1 ] for xed (Q k). Hence, the minimum upper bound of the expected annual total cost will occur at the end point of the interval Li Li;1 ] for xed (Q k). In addition, it can be shown that EAC (Q k L) is a convex function in Q and k for xed L. Therefore, the rst order conditions are necessary and su cient conditions for optimality. The rst order conditions are:
v u h 2 1 u Q = t 2D A + 2D 0 + 2 2 h( 1 + 2 )

p p 2 L( 1 + k ; k) + R(L)]

(14)

and

1p k2 ; k = + h Q (15) 2 h(1 ; ) Q + D 2 1+k 2 2 We observe that when 0 = 1 = 0 and = 1 (i.e., the quantity received is equal to the quantity ordered), equation (14) and (15) can be reduced as the optimal solution for the model of Moon and Choi 10]. Therefore, we can establish the following iterative algorithm to nd the optimal value of (Q k L). Step 1. For each Li i = 0 1 : : : n,perform (i) to (iv). (i) Start with ki1 = 0. (ii) By substituting the value ki1 into (14), evaluate Qi1 . (iii) By using Qil , determine ki2 from (15). (iv) Repeat (ii) to (iii) until no changes occurs in the values of Qi and ki . Step 2. For each (Qi ki Li ), compute the corresponding minimum upper bound of the expected annual total cost EAC u (Qi ki Li ) i = 0 1 : : : n. Step 3. Find mini=0 1 ::: n EAC u (Qi ki Li ): If EAC u (Qu ku Lu ) = mini=0 1 ::: n EAC u (Qi ki Li ), then (Qu ku Lu ) is the p optimal solution. And hence, the optimal reorder point ru = DLu + ku Lu .

Algorithm 2.

tribution of the lead time demand is free. Applying the proposed Algorithm 2 procedure yields the results shown in Table 4. A summary of these optimal results is presented in Table 5.

Example 2. The data is as in Example 1. We assume here that the probability dis-

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Table 4. Results of the optimal procedure (Li in week)

0.0 8 6 4 3 0.5 8 6 4 3 0.8 8 6 4 3 1.0 8 6 4 3

Li R(Li) Qi ri EAC (Qi ki Li)

0 5.6 22.4 57.4 0 5.6 22.4 57.4 0 5.6 22.4 57.4 0 5.6 22.4 57.4 318 312 306 306 308 304 300 300 302 298 295 296 296 293 291 292 127 100 73 59 117 92 66 52 109 84 60 47 101 78 54 42 6062.84 5673.86 5241.27 5065.65 5284.98 5003.33 4696.86 4588.86 4665.32 4460.26 4252.11 4206.62 4073.97 3949.14 3835.35 3841.74

Table 5. Summary of the results of the optimal procedure(Li in week)

0.0 0.5 0.8 1.0

3 3 3 4

306 300 296 291

59 52 47 54

EAC(Q r L ) 5065.65 4588.86 4206.62 3835.35

The expected total annual cost EAC (Qu ru Lu ) is obtained by substituting Qu ru and Lu into (7) when the lead time demand is normally distributed. The expected value of additional information (EVAI) is the largest amount that one is willing to pay for the knowledge of the form of the lead time demand distribution and is equal to EAC (Qu ru Lu) ; EAC (Q r L ). Moreover, the cost penalty is the ratio of the approximate expected cost to the optimal one. It can be obtained from Table 6 that the cost performance of the distribution free approach is improving as gets larger.

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Table 6. Comparison of the two procedures

0.0 0.5 0.8 1.0 EAC(Q r L ) 4026.27 3905.90 3812.71 3639.72 EAC(Q r L ) 3770.59 3703.26 3622.43 3511.06 EVAI 255.68 202.64 190.28 128.66 Cost penalty 1.068 1.055 1.053 1.037

4. E ects of the Parameters

1. Notice that if = 1, equation (9) reduces to the expected total annual cost of the backorders case, and hence (9) becomes

=1

v u 2 u 2D A + h 0 + 2D =t

h(

2 2 1+ )

L (k) + R(L)]

(16)

When = 0, equation (9) reduces to that of the lost sales case, and thus (9) becomes

=0

v u 2 u 2D A + h 0 + ( 2D =t

+ 0 ) L (k) + R(L)] 2 h( 1 + 2 )

(17)

Hence, for xed L and k, comparing (16) and (17), we get Q =0 > Q =1 . That is, the order quantity per cycle in the lost sales case is greater than in the backorders case (The distribution free model has same result). 2. The e ect of on the minimum expected total annual cost, say EAC , may be examined. It has minimum value when = 1 (backorder case) and maximum value when = 0(lost sales case). Hence, for 0 < < 1 EAC =1 < EAC < EAC =0 . 3. For xed k and L (Li Li;1 ), taking the derivative of (9) with respect to L, we obtain

D 1 dQ = 2 + 2 ) 2 1 ; ci ] dL Qh( 1
E (X ;r ) where 1 is the stockout cost per unit time during lead time L. Because L D Q and h are all positive, hence, if 1 > 2ci , we get dQ > 0, this means increasing dL the lead time L increases the order quantity Q and if dQ < 0, this implies increasing dL lead time L decreases the order quantity Q.

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4. We assume that the p.d.f.fx(x) of lead time demand is normal distribution. Under this situation, for xed and L (Li Li;1 ), taking the derivative of (9) with respect to k, we have

This means that Q and k have negative relative relation. It implies decreasing k (or, equivalently, decreasing the reorder point r) increases the order quantity Q (The distribution free model has same result). 2 2 5. Form Table 7 we can observe the e ect of 0 1 and on Q r and EAC (Q r L ) when the lead time demand follows a normal distribution and xed L = 4 weeks. 2 Clearly, the increase in 0 results in increases in Q and EAC (Q r L ) of the 2 system. In addition, an increase in 1 results in decreases of Q , but an increase in EAC (Q r L ). Moreover, the decrease in results in increases of Q and EAC (Q r L ). Besides, it is seen that the optimal reorder point (r ) is almost 2 2 insensitive to change in all parameters 0 1 and .
2 2 Table 7. E ect of 0 , 1 and on Q r and EAC (Q r L ). (The lead

p dQ = ;D L P (k) < 0 2 dk Qh( 1 + 2 ) z

time demand follows a normal distribution parameters 2 0 =150 =125 =75 =50 =0.125 =0.075 =0.05 =0.8 =0.6 =0.4 =0.2
2 1 =0.15

= 1 (full backordered))

331 305 243 206 268 272 280 284 306 387 514 698

Q r EAC (Q r L )
54 55 57 58 56 56 55 55 56 56 57 60 3991.42 3761.62 3235.57 2944.37 3592.34 3552.74 3467.30 3421.46 3557.46 3718.23 4151.24 5920.10

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6. Concluding Remarks
This paper presents a mixed inventory model with variable lead time when the amount received is uncertain for minimizing the sum of the ordering cost, holding cost, shortage cost and the lead time crashing cost, in which the order quantity, reorder point and lead time are decision variables. In this article, we rst assume that the lead time demand follows a normal distribution, and then relax the assumption about the form of the probability distribution, and then relax the assumption about the form of the probability distribution of the lead time demand and apply the minimax distribution free procedure to solve the problem. For both cases, we develop e ective procedures for nding the optimal solution. Furthermore, the e ects of parameters are also included. In future research on this problem, it would be interesting to deal with a mixed inventory model when the amount received is uncertain, subject to a service level constraint.

Acknowledgement
The author is thankful to the anonymous referees for their constructive suggestions to improve the paper.

References
1] Ben-Daya, M. and Raouf, A., Inventory models involving lead time as decision variable, Journal of Operational Research Society, Vol.45, pp.579-582, 1994. 2] Das, C., Approximate solution to the ( ) inventory model for gamma lead time demand, Management Science, Vol.22, pp.273-282,1975. 3] Foote, B., Kebriaei, N. and Kumin, H., Heuristic policies for inventory ordering problems with long and randomly varying lead time, Journal of Operations Management, Vol.7, pp15-124, 1988. 4] Gor, A. S. and Shah, N. H., Order level lot-size inventory model for deteriorating items under random supply, Industrial Engineering, Vol.23, pp.9-15, 1994. 5] Hargia, M. and Ben-Daya, M.,Some stochastic inventory models with deterministic variable lead time, European Journal of Operational Research, Vol.113, pp42-51, 1999. 6] Karlo, A. and Gohil, M., A lot-size model with backlogging when the amount received is uncertain, International Journal of Production Research, Vol.20, pp.775-786,1994. 7] Liao, C. J. and Shyu, C. H., An analytical determination of lead time with normal demand, International Journal of Operation and Production Management, Vol.11, pp.72-78, 1991. 8] Magson, D.,Stock control when the lead time cannot be considered constant, Journal of the Operational Research, Vol.30, pp.317-322,1979. 9] Moon, I. and Gallego, G., Distribution free procedures for some inventory models, Journal of Operational Research Society, Vol.45, pp.651-658, 1994. 10] Moon, I. and Choi, S., A note on lead time and distributional assumptions in continuous review inventory models, Computers and Operations Research, Vol.25, pp.1007-1012, 1998.
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11] Naddor, N., Inventory Systems, John Wiley, New York, 1966. 12] Ouyang, L. Y., Yeh, N. C. and Wu, K. S., Mixture Inventory models with backorders and lost sales for variable lead time, Journal of Operational Research Society, Vol. 47, pp.829-832, 1996. 13] Ouyang, L. Y. and Wu, K. S., Mixture Inventory model involving variable lead time with a service level constraint, Computers and Operations Research, Vol. 24, pp. 875-882, 1997. 14] Ouyang, L. Y. and Wu, K. S., A minimax distribution free procedure for mixed inventory model with variable lead time, International Journal of Production Economics, Vol. 56-57, pp. 551-516, 1998. 15] Ouyang, L. Y. and Wu, K. S., Mixture inventory model involving variable lead time and defective units, Journal of Statistics and Management Systems, To be appeared in 1999. 16] Ouyang, L. Y. and Chuang, B. R., ( ) inventory model involving quantity discounts and a stochastic backorder rate, Production Planning and Control, Vol. 10, pp. 426-433, 1999. 17] Silver, E. A. Establishing the reorder quantity when the amount received is uncertain, INFOR, Vol. 14, pp. 32-39, 1976. 18] Silver, E. A. and Peterson, R., Decision Systems for Inventory Management and Production Planning, John Wiley, New York, 1985. 19] Tersine, R. J., Principe of Inventory and Material Management, North Holland, New York, 1982. 20] Warrier, T. V. and Shah, N. H., A lot-size model with partial backlogging when the amount received is uncertain for deteriorating items, International Journal of Systems Sciences, Vol. 30, pp. 205-210, 1999.
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