Appendices:

Planning capacity and safety stocks in a serial

production-distribution system with multiple products
1
Foad Ghadimi Tarik Aouam1,2,∗

July 9, 2020

Appendix A. Expected total cost of the system

The expected total cost of the system includes the holding cost of WIP at the manufacturer, inventory
holding costs at the warehouse and retailer and the overtime costs for expediting backorders. In the
following, each of these cost components is written based on Klosterhalfen and Minner (2010) and
Aouam and Kumar (2019).

Manufacturer’s cost. The expected WIP of product j ∈ Mw at the manufacturer is

E(W IPj ) = λj LTw (Rw ) − E(BOjwhs ) (A.1)

The expected WIP at workcenter w, λj LTw (Rw ), is adjusted by the expected warehouse backorders
E(BOjwhs ), which are expedited using overtime. The expected warehouse backorders can be expressed
as
Z +∞ yj − Bjwhs  yj − λj T whs    √
E(BOjwhs ) = √ φ √ dyj = φ(zjwhs ) − zjwhs (1 − Φ(zjwhs )) σj T whs
Bjwhs σj T whs σj T whs
(A.2)

or,
√
E(BOjwhs ) = G(zjwhs )σj T whs (A.3)

where Bjwhs is the base stock level at the warehouse, yj are realizations of Yj , which denotes random
demand during replenishment lead time T whs , and G(zjwhs ) = φ(zjwhs ) − zjwhs (1 − Φ(zjwhs )). φ(·)
∗
Corresponding author
1
Faculty of Economics and Business Administration, Ghent University, Tweekerkenstraat 2, 9000 Gent, Belgium
2
BearLab - Rabat Business School, Université Internationale de Rabat, Morocco
Email addresses: foad.ghadimi@ugent.be (F. Ghadimi) tarik.aouam@ugent.be (T. Aouam)

1
and Φ(·) are the standard normal probability density function and cumulative distribution function,
respectively.
The manufacturer’s cost T C m equals the WIP holding cost plus overtime cost and is given by

hwip wip
X X
T Cm = whs
j λj LTw (Rw ) − hj E(BOj ) + cm whs
j E(BOj ) (A.4)
w∈W j∈Mw

Distribution system’s cost. This cost includes the costs of holding inventory and expediting at the
warehouse and retailer. The expected on-hand inventory at the warehouse can be expressed as
Z Bwhs whs
whs
j Bj − yj  yj − λj T whs 
E(OHj ) = √ φ √ dyj
−∞ σj T whs σj T whs
  √
= zjwhs + φ(zjwhs ) − zjwhs (1 − Φ(zjwhs )) σj T whs (A.5)

or,
√
E(OHjwhs ) = zjwhs σj T whs + E(BOjwhs ) (A.6)

The inventory of product j at the retailer is

λj τjret − E(BOjret ) + E(OHjret ), (A.7)

and includes the pipeline inventory, adjusted by retailer’s expected backorders that are expedited,
and expected on-hand inventory. The retailer’s expected amount of backorders and on-hand inventory
√ √
of product j are given by E(BOjret ) = G(zjret )σj T ret and E(OHjret ) = zjret σj T ret + E(BOjret ),
respectively. While the expected cost of expediting backordered units is cds ret
j E(BOj ).
The total cot of the distribution system is
 
h0,whs 0,ret
X
T C ds = j E(OHj
whs
) + hj λ j τj
ret
− E(BO ret
j ) + E(OHj
ret
) + cds ret
j E(BOj ) (A.8)
j∈M

Cost of the production-distribution system. The expected total cost is the sum of costs at the manu-
facturer and the distribution system, i.e.

T C = T C m + T C ds
X X wip
= hj λj LTw (Rw ) − hwip whs
j E(BOj ) + cm whs
j E(BOj ) + h0,whs
j E(OHjwhs )
w∈W j∈Mw

+ h0,ret
j λj τjret − h0,ret
j E(BOjret ) + h0,ret
j E(OHjret ) + cds
j E(BOj )
ret

X X wip h i √
= hj λj LTw (Rw ) + h0,whsj z whs
j + (cm
j + h 0,whs
j − h wip
j )G(z whs
j ) σj T whs
w∈W j∈Mw
h i √
+ h0,ret
j λ j τj
ret
+ h0,ret ret
j z j + cds
j G(z ret
j ) σj T ret
X X  wip √ √  X
= hj λj LTw (Rw ) + Hj (zjwhs )σj T whs + Hj (zjret )σj T ret + h0,ret
j λj τjret
w∈W j∈Mw j∈M

(A.9)

where, Hj (zjwhs ) = h0,whs

j zjwhs + (cm 0,whs
j + hj − hwip whs ) and H (z ret ) = h0,ret z ret + cds G(z ret )
j )G(zj j j j j j j
refer to the augmented inventory costs at the warehouse and retailer, respectively. They include

2
the unit cost of holding inventory and expediting excess demand. The uncertainty periods at the
warehouse and retailer are the corresponding net replenishment times, which are given by T whs =
SIj + LTw (Rw ) + τjwhs − Sjwhs and T ret = Sjwhs + τjret − Sjret , respectively. Further, notice that the term
0,ret
λj τjret is constant and hence can be dropped from the expected total cost of the system to
P
j∈M hj
be minimized.

Appendix B. Proofs

B.1 Proof for Proposition 1

Proof. The objective function of PK is concave in S whs therefore the optimal value of the outgoing
service time lies at the extreme points (Simpson Jr, 1958), i.e. S whs,∗ = 0, S whs,∗ = RLT or S whs,∗ =
max{0, S K }, where S K is the root of constraint (11).

B.2 Proof for Lemma 2

Proof. When there is no storage constraint, extreme points for the outgoing service times are S whs,∗ = 0
and S whs,∗ = RLT and we have

f (S whs = 0) ≤ f (S whs = RLT ) ⇔

√ √ p
H(z whs )σ RLT + H(z ret )σ τ ret ≤ H(z ret )σ RLT + τ ret ⇔
√ √ p
ν RLT + τ ret ≤ RLT + τ ret ⇔
√
τ ret + ν 2 RLT + 2ν τ ret RLT ≤ RLT + τ ret ⇔
r !
2 τ ret
RLT ν − 1 + 2ν ≤0⇔
RLT
r
τ ret 1 − ν2
≤ ⇔
RLT 2ν
4ν 2
τ ret ≤ RLT
(1 − ν 2 )2

B.3 Proof for Proposition 2

√
Proof. When K = λRLT + z whs σ RLT then S K = 0. When there is finite storage capacity, i.e.
K < K 0 , S K > 0 and setting S whs,∗ = 0 is not feasible since it dose not satisfy the storage constraint
(11). Therefore, extreme points for the outgoing service times are S whs,∗ = S K and S whs,∗ = RLT .

3
 √
(z whs )2 σ 2 +2λK−z whs σ (z whs )2 σ 2 +4λK
Let X = 2λ2
which is always non-negative and we have

f (S whs = S K ) ≤ f (S whs = RLT ) ⇔

√ p p
H(z whs )σ X + H(z ret )σ RLT − X + τ ret ≤ H(z ret )σ RLT + τ ret ⇔
√ p p
ν X + RLT + τ ret − X ≤ RLT + τ ret ⇔
p
ν 2 (X) + RLT (R) + τ ret − X + 2ν X (RLT + τ ret − X) ≤ RLT + τ ret ⇔
r !
2 RLT + τ ret − X
X ν − 1 + 2ν ≤0⇔
X
r
RLT + τ ret − X 1 − ν2
≤ ⇔
X 2ν
RLT + τ ret − X (1 − ν 2 )2
≤ ⇔
X  4ν 2
(1 + ν 2 )2

RLT ≤ X − τ ret ⇔
4ν 2
p
(z whs )2 σ 2 + 2λK − z whs σ (z whs )2 σ 2 + 4λK (1 + ν 2 )2
 
RLT ≤ − τ ret
2λ2 4ν 2

B.4 Proof for Corollary 2.2

∂RLT10
 
16ν 2 8ν 2
Proof. The first derivative of the RLT10 with regards to ν is ∂ν = τ ret (1−ν 2 )3
+ (1−ν 2 )2
. Because
∂RLT10
ν < 1, we have ∂ν > 0 and RLT10 is an increasing function of the ν.

B.5 Proof for Corollary 2.3

 
∂RLT20 (1+ν 2 )2 1 z whs σ
Proof. The first derivative of the RLT20
with regards to K is = ∂K 4ν 2 λ − √ =
λ (z whs )2 σ 2 +4λK
√ 
whs
2 2 (z whs 2 2 ∂RLT20
(1+ν )
√ )whsσ +4λK−z σ p
4ν 2 2 2
. We have (z whs )2 σ 2 + 4λK − z whs σ ≥ 0. Therefore ∂K ≥ 0 and
λ (z ) σ +4λK
RLT20 is an increasing function of the K. √
∂RLT20 (z whs )2 σ 2 +2λK−z whs σ (z whs )2 σ 2 +4λK
 
ν 4 −1
The first derivative of the RLT20 with regards to ν is ∂ν = 2λ2 2ν 3
.
ν 4 −1
p
Because ν < 1, we have 2ν 3
< 0. In the following we show that (z ) σ +2λK−z whs σ (z whs )2 σ 2
whs 2 2 + 4λK >
0. Therefore, RLT20 is a decreasing function of the ν.
q
(z whs )2 σ 2 + 2λK − z whs σ (z whs )2 σ 2 + 4λK > 0 ⇔
q
(z whs )2 σ 2 + 2λK > z whs σ (z whs )2 σ 2 + 4λK ⇔
 
(z whs )4 σ 4 + 4λ2 K 2 + 4(z whs )2 σ 2 λK > (z whs )2 σ 2 (z whs )2 σ 2 + 4λK ⇔

4λ2 K 2 > 0

4
B.6 Proof for Lemma 3

Proof. When there is infinite storage capacity, extreme points for the outgoing service times are
S whs,∗ = 0 and S whs,∗ = RLT and we have

f (S whs = 0) ≤ f (S whs = RLT ) ⇔

√ √ p
H(z whs )σ RLT + H(z ret )σ τ ret ≤ H(z ret )σ τ ret + RLT ⇔
√ √ p
ν RLT + τ ret ≤ τ ret + RLT ⇔
r r
τ ret τ ret
ν+ ≤ 1+ ⇔
RLT RLT
r r
τ ret τ ret
ν ≤ 1+ −
RLT RLT

B.7 Proof for Proposition 3

Proof. When there is finite storage capacity, i.e. K < K 0 , S K > 0 and having S whs,∗ = 0 is not
feasible since it dose not satisfy the storage constraint (11). Therefore, extreme points
√ for the outgoing
(z whs )2 σ 2 +2λK−z whs σ (z whs )2 σ 2 +4λK
service times are S whs,∗ = S K and S whs,∗ = RLT . Let X = 2λ2
, which
is always non-negative and we have

f (S whs = S K ) ≤ f (S whs = RLT ) ⇔

√ p p
H(z whs )σ X + H(z ret )σ RLT − X + τ ret ≤ H(z ret )σ RLT + τ ret ⇔
r r
RLT + τ ret RLT + τ ret
ν+ −1≤ ⇔
X X
s
2λ2 (RLT + τ ret )
ν≤ p
(z whs )2 σ 2 + 2λK − z whs σ (z whs )2 σ 2 + 4λK
s
2λ2 (RLT + τ ret )
− p −1
(z whs )2 σ 2 + 2λK − z whs σ (z whs )2 σ 2 + 4λK

B.8 Proof for Corollary 3.1

Proof. The first derivative of the ν10 with regards to RLT is as follows:
q q
τ ret τ ret
!
0
∂ν1 τ ret 1 + RLT − RLT
= q
>0
∂RLT 2RLT τ ret RLT + τ ret

Therefore, ν10 is an increasing function of the RLT . We also assume that LT (R) is a decreasing function
B
of the R which is equal to b, therefore ν10 is a decreasing function of the budget B.

5
B.9 Proof for Corollary 3.2


2λ2 RLT +τ ret
Proof. Let X = √ . Therefore, the first derivative of the ν20 with
(z whs )2 σ 2 +2λK−z whs σ (z whs )2 σ 2 +4λK
regards to RLT is as follows:
√ √
∂ν20 1 X −1− X
=  × p <0
∂RLT X(X − 1)
p
2 (z whs )2 σ 2 + 2λK − z whs σ (z whs )2 σ 2 + 4λK

Therefore, ν20 is a decreasing function of the RLT . We also assume that LT (R) is a decreasing function
B
of the R which is equal to therefore ν20 is an increasing function of the budget B.

b,
p 2λ2 RLT +τ ret
Let X1 = (z whs )2 σ 2 + 2λK − z whs σ (z whs )2 σ 2 + 4λK and X2 = X1 . Therefore, the
first derivative of the ν20 with regards to X1 is as follows:

√ √ !
∂ν20 2λ2 RLT + τ ret X2 − X2 − 1
= >0
X12
p
∂X1 X2 (X2 − 1)

Therefore, ν20 is an increasing function of the X1 . In the following we are showing that X1 is an
increasing function of the K.
! p !
∂X1 z whs σ (z whs )2 σ 2 + 4λK − z whs σ
= 2λ 1 − p = 2λ p >0
∂K (z whs )2 σ 2 + 4λK (z whs )2 σ 2 + 4λK

Therefore, ν20 is an increasing function of the storage capacity K.

Appendix C. Lead time estimating based on cycle time-throughput curves

The production cycle time (PCT) of a workstation is defined as a random variable representing the
time required for an item to traverse the workstation (Hopp and Spearman 2011). Production cycle
time can be controlled by setting the rate at which items are processed in a workstation, i.e. the
throughput rate or equivalently capacity level (Yang et al., 2008). A cycle time-throughput percentile
(CT-TH) curve is a given percentile of the PCT distribution as a function of the throughput. For
instance, if the αLT -percentile CT-TH curve is used to set the throughput or capacity level, then
αLT % of the time, the actual lead time of any given item will meet the promised delivery time, i.e.
P(P CTw ≤ tw ) ≥ αLT %.
As explained in Yang et al. (2008), a sequence of simulation experiments is needed to characterize
the PCT distribution as a function of the throughput. To approximate percentiles of PCT, they fit
curves to the first three moments (equivalently, mean, variance, and skewness) of PCT as a function of
throughput, match the generalized gamma distribution (GGD), which is a highly flexible distribution,
to these three moments, and then invert the fitted distribution to obtain percentiles. This procedure
is summarized as follows:

a) A discrete-event simulation model for each workcenter is developed and simulation runs are
made to collect PCT realizations at different throughput or equivalently capacity levels. For the
 
(n) λw
purpose of estimating the nth moment curves, an output response gq Rw can be obtained
λw
from the qth replication performed at throughput level Rw as follows:

6
  
λw  in
PL Rw
h
λw

λw

l=1 CTq,l R w
gq(n) =   (C.10)
Rw L Rλw
w

 
λw
Where, CTq,l represents the PCT realization for the lth item completed in the qth repli-
Rw
 
λw λw
cation at throughput level R w
, and L Rw is the number of items simulated in steady state for
λw
simulation at throughput level Rw . This allows us to predict the first three moments of PCT at
λw
any throughput level Rw .

b) A moment matching method is used to fit a GGD cumulative distribution function

        
λw λw λw λw
G t; p1 R , p2 , p3 as an approximation for the PCT distribution, where p1 Rw ,
  w  R w Rw
λw λw
p2 R w
and p3 R w
are distribution parameters that depend on throughput or capacity level
λw
Rw .

c) Given the obtained PCT distribution at any throughput level, the αw LT percentile of PCT, i.e.
 
LT ) , can be estimated by taking the inverse of the cumulative distribution function of
G λw (αw
Rw
the fitted GGD. A curve can then be fitted based on the following metamodel to formulate the
production lead time as a function of the throughput or capacity level:

LT
G λw (αw ) = LTw (Rw , a, x) +  (C.11)
Rw

where,
Pe λw y
y=0 ay ( Rw )
LTw (Rw , a, x) = λw x
(C.12)
(1 − R w
)

where, the exponent x, the polynomial order e and the coefficient vector a = (a0 , a1 , ..., ae ) are
the unknown parameters in the metamodel. The polynomial order of the lead time metamodel
(C.12) is determined in a forward-selection manner. In fact, the metamodel for y = 0, 1, ... is
successively fitted. After fitting the metamodel at each degree (y ≥ 0), an extra sum of square
analysis (Kass, 1990) is performed. Then the value of y increases until the variability of the
model is found to be insignificant at a confidence level of 95%.