313
Inventory control using a service
the expected customer order waiting time
H o r s t TEMPELMEIER
Instit~t f~r Betnebwirtschaftslehre, Technische
Hochschule Darmstadt, Germany, Fed Rep.
Abstract. In this paper an analytical model is
presented which permits the determination of .he
minimal inventory reorder point sub}ect to (a) a
maximum specified expected customer order wa~t-
m g ~ime or (b) a maximum specified probability of
a customer order waiting more than a prede-
termined time span. The probability distribution
of the customer order wmting time is determined
for an arbitrary demand distribution (e.g. normal,
gamma or exponentml) and under stochastic re-
plenishment lead time conditions by use of argu-
ments from renewal theory. The results established
can be used for the customer-oriented control of
inventory policy as well as for the analys~s of
multi-echelon inventory systems.
£eywords: ~nvento~T, production distribution, sto-
chastic processes
Although theoretical considerations as wel~ as
the results of empirical mvesUgations lead to the
conclusion, that from a customers point of v~ew
the customer order wa~mg t~me as the most im-
portant element in the physxcal dasmbution service
mix, inventory theory and practice m general use
the expected quantity sl~ort (or some o~her cme-
rion) as a measure of those parts of the physical
distribt~tion service, wh:ch can be influenced by
inventory pohcy [11,14].
Considering the amount of work that has been
done in the field of inventory the, wy, only rela-
tively ~ew researchers have d~,cu~sed measures of
sepace, wi-uch are &rec~iy retatee to "me cus~.o~er
kecc~ved Dece~{t~er1983. revised March 19~4
North-Holla~d
European Journal of Operat~caN Research I9 (t985) 313-3 ~.3
0377-2217/85/$3 30 © 1985, El,.e~er Sc~enc~Pabt~she~sB V (Nortk-[-iotlar:d)
" " c o n s t r a i n t on
order waiting time, see e.g. [1,3,5,8].
Brown [3] and Akinrfiy~ and Silver [1] treat the
problem of determining the expected duration of a
s~oekout situation. By interpreting the demand
process as a special diffusion process known as a
W~ener process, Ahnniyl and Silver [1] dera ee the
pr;)bablfity dlsmbution of the durauon of a
stockout under normally as ~eH as Pobson d,smb-
uted demand conditions ae~d given a fixed !ead
t~me.
The durauon of a stockout s~tuatmn can be
interpreted as an upper b o u n d on the customer
order wamng t~me and can therefore be u,,ed to
bound the customer's risk of wamng too long. As
wilt be shown ~ater, the durataon of a stoekouu as
used by A~nmy~ and Silver, is needed as an
intermediary in the process of determmarg the
pret-~abality distr, bution of the customer order
wamng tlme.
g ruse [81 derives the cusgomer (demanc' ,'ng~./
a'a~f.ng gtm.e {physical dabtr~bt~.t'~cn ser,a~e ur~,e~
dist~ ~buuon m a conlgnuos rewew (,~, S ) mw~mtor~
syst,.'m wath cortstant lcad t~mes. For the cas~ of
umt sazed demand h~ argur_aents ieaC ~o the Ye-
s, o r s L = ?oW formula [8J, which m the c u r r ~ '
co~e.~t ~tates that under stead}, ~tate con4:uor~s
the e.,~pec~ed wamng ume unu~ d e h v e ~ / c l a one
unet demand as equal to the expected qt anuty
sho~t &vided by the mean demand rate per ume
p e n a d (see also [5])
One major imphca,~on o; Ka'use's results ,s that
eveL ff a customer ogders, say iC0 umts s~mttao
aeo'tsly, w~th respect to ser'v~ce t~me each d.~maed
umt is treated separately and that, therefore ~t can
be viewed as an asotated customer, o'dee T'ms
moons that paruat dd~very must be allowed
In many practical inventory satuauons ho~
eve.~, customer orders are frequently cons~<,~erabt.~
greate~ t.haa o~e umt and r0arua~ d.li~,_.~ ~s r~ot
allo,,vedo On the o;ner l~aad, a carte.act rr.gr,:
toiera~e ~aruaI dehvery, g m t~e fed5 he ~ be_rig
seroe2 ~ad1? ,:s 1o,=:~ as lu; older ~s r~o ~'~,~
cor~,spie:e@, ~_re~pec;,,'e ~,2 the ~ze of ~.?~eqa=nuL
short. [~ bo~h case?, w~gh ~_es~sgct to the cvstome:
order servise [[me obs::r.~ed, a customer conszde~
314 H Tempelmewr / Inventory control t;~mg a service constraint
all umts of an order as an enti,~y.
In what follows, we shall derive the'. probabilits-
mstribution of the waiting time for a customer
order m a daffy review (s, q) inventory system
with arbitrary d~screte distributed lead tL,ne and
arbitrary distribution of demand quantity per day.
This can be acNeved by using arguments from
renewal theory. It will be seen, that the results
w e n by Aldnniyi and Silver are special solutions
• v subprob~err.s of the general problem of de
terrmning the wo?ability distribution of the wait-
mg time for a customer order.
Knowing this probability distribution, we are
able to determine the minimal reorder pr~m~ subject
to a constra, nt on the ,,.xpected customer order
wamng tm~e. Alternativel.~, it is possible to use as a
constraint a managemer~-specified percentage of
customer orders being con t~letely lehvt red within a
~:t,e~ rune span. Th~s last -mteno~ ~s often cited as
~ m g :~ serwce measure wh,.ch ~s fr,.:quenfiy em-
ployed by practitioners [2, p. 8; 10, I,. 246; 13, p.
1i4].
The inventory system ~xamined is a statmnary
(s, q)-system. The smalle ' tame umt considered xs
one day. Inventory posm ,n as re~,lewed at the end
of each day If it is e( ml to or tess than the
reorder point s, a reple ~tshment order of fl~ed
quantity q ~s placed. We assume the order quantity
,ts gwea, because we confine cur attention to the
problem of deterrmnmg the ~ m m ~ l reorder prom
subject to a service zonstramt. For a mode~ which
simultaneously determines s and q. see [18].
If a replenishnner ~.order is placed at the end of
day ~, it amves aftei a chscrete rmadom lead time L
(at the end of day ,' + L, that ~s, m the morning of
day ~ - - L + 1 before the delivery of that :lays
regalar customer orders), which has probability
d~stfibution P{ L = ~, i = lm,~. . . . . ;,~,~,,}. Daffy de-
mand quantmes ~re independentl5 and identically
distributed random vmiables R, ( t = l . 2 .... ),
which m generM may be continuous or (hscrete.
For ease of our eq~osition, however, we aysume
the demanc., auaptmes to be conlmuogs.
Ctastomer o~.ders w ~ c h cannot be dehve:'ed
comple~l) because ,,f a stock,~ut smmt~on are
backordcre~! until t ) : end of the omrent reNem~h-
m~at ,end '~:me (in ~.~_emormng of da-, .~+ L + 1).
,vh,.~': they are de|iv~red w~h p~,ofityo Several re-
ptems~umev~, o~ders may be out;tanding s,i~'n,fl~a.
neeus!v, it ~s ass~nted, t.,zat the order quamtt) c! is
large enough tha; no custome~ order vdi want
longer than the day the last replenishment order
placed arrives. Note thai this does not necessarily
mean that all backorders vanish when a replenish-
ment order arrives. In fac t, if q is small compared
to the expected lead time demand, then sometimes
it may not be lalge enough e~en to deriver all
backorders waiting at the. end of a replenistmaent
eyrie. If demand per day is a continuous random
variable with no upper bound (e.g narmMly nr
gamma distributexl), the fulfilment of this latter
assumption cannot be guaranteed in a strict
mathematical sense. If 1he replenishment order
quantxty plus the reorder point is greater than the
maxam~Jm reasonable lead time demand, then it is
extremely unlikely that the assumption is violated.
In deriving the probability distribution o7 the
customer order waiting time, we make ase of the
following definitions:
- The duration o f a stoeko,.t situation, J(s), is the
time span (re:tuber of days) during which the
inventory on hand is less than 0;
- the coverage of an inventory on hand, N ( s ) , is
the number of days (one-period demands) that
can fully be satisfied from the stock on hand;
- the customer order wamng time, W(s), '~s the
number of days a customer order that arrives at
an arbitrary day has to wait until complete
delivery.
By dehnition, for a fi~ed lead t~me of length t
the following relatmns hold"
duration of a stockout
= max{0, lead time - co,zerage), (1)
J(s) = (0,1 -
lead time >f duration of a stockout
>i customer waiting time, (2)
w(s).
According to expression (1) a stockou situation
occurs only when the coverage is less th~ n the lead
t~me. Expression [2] states that ~he dmatlon of a
stocl-out situation ~s only an upper bound on the
actually experienced customer order w a r m g time.
For simpficity of presentation we first assume
that i~ame&atdy before a reple~fishment orde~ is
placed, stoca: on hand is equal to the inventory
position. Ir~ ger~eral tNs wilt only be the case, if
there is at most one order omstanding~ Ccnse-
ouences that arise when more ~han one replenish°
m~m orders are allowed t~ be ottt~ta~dmg sb:li be
d~,~c.assed ia~er.
 H. Tempelmeier / inventory co.*rg! J m g ~ aen'me ¢onstralnt 315

2. The coverage of a ~ a n f i t y o~ hand s The coverage N ( s ) is exactly n time periods, ~f

the cumulative demand during time [0, n] can be
General results for an arb*.trary demand &str~button dehvered from stock on hand ( s ) and if the cumu-
lative demand during time [0, n + t] exceeds r.
The relatmnship between an mventow on hand That is. N ( s ) = n ff Y~<<.s and Y~+~ > s . Fur-
(i.e. a reorder point) s and the customer order the:'raore, we have ?v(s)>i n ff Y~ ~< r, and N ( s ) = 0
waiting time may be described b y using concepts ff :~ > s.
from renewal theory, see [7,16]. Let's first de- Thus, by using expressmn (4), the probaNhty
termine the relationship between the inventory on for N(s) exceeding (or being equal to) n ~s given
hand s and its coverage N(s). by
Suppose at i m e t = 0 the inventory position has
fallen exactly to the reorder point and a replenish- (5)
ment order has been placed. In this case the quan- "i he proba.r, dtty &strebut,on of the co~'erage V(
tity (reorder point) s serves to fill the demands m a j now be stated as follows
arriving during the replenishment lead time', that is
the demands occurring during the time span [0, t] (6
(where l denotes the actual replemshment lead
time length, which is assumed to be an obsexwation and
of the random va_n_able ~ w~th p.~obacmty - " "" P( k = 2.5 ,
t}). J

Let { R , ( t = t, 2 . . . . . l)} denote the sequence of =

random varmbles for the (one-period) demand
quantities, which--as we will a s s u m e - - m e inde-
pendently and identmatly distributed; then the
accumulated demand during the time [0, t] ~s g~ven
by the random variable Y, such tha~
¢
Y,=ZR,, ~ = 1 , 2 . . . . . l.
Consider the &screte coum,ng process { N(,,'), s >1
0}, where N(s) represents the number of ume
periods (demands) whmh can be complege~}' filled
from the stock on hand s. N(s) can be termed the
coverage of s. The coverage assumes the value
N ( s ) = 0, if the demand quanUty of the first t~me
period (day) of the reptemshment lead time ex-
ceeds s.
The above mentioned processes, demand { R,(,,
= 1, 2,. )}, counting {N(s), s > 0} and cumula-
t,ve demand { Y , ( t = I , 2 .... )} characterize a re-
newal process [7].
As the cumutat_,ve demand Y, ~s assumed to be
the sum of t independently and ~.dentically d~smb-
uted random varmbles R, ( ~ = 1 , 2, ¢), ~he
cumulauvep,o~a~,d~.) c-,~-,%=" c, f ( )( ) c' "
given by ~he ¢-fotd convolution of the demand
distribut,on F~(y) w~th itse!f.
&.':>(>,),
where the s~gn * denotes the convolution operator.
,~=t,2 .... (7)
C- _% express,on (5), ",~e obtain
-, p(n+l)(
P ','!,l=n}
c=1o2, (t)
(3)
Fc ~ar we have developed ~he probabA~ty d~tn-
bm<~.n of the coverage N(~) Using relation ~1 ,~c
can r,ow construct the condmona] probab, k,y O~-,-
tnb~,t~oa of the du~amm oJ a sgoc/~.oul ,,t,ml.m
.l(s, gwen a fixed re~.~lemshraen, lead tnne o~
}entre L aa foUcws:
P{J(~}=OIL=[]. =PfAqs)>~]",,_ =[~s, (9)
j-!. ,l. {~0}
lr~ " rder to obtain tht~ probability d~_stnbu ~on
we ~:cc2 not make an) specmf assumptions . m -
cern_~:~g the demand d_stnbut~on as ~s doqe by
Akmn.,yt and Silver. The resul~ gwen by d e.e
auth ,-' :.,re :mohed m expres~mns (9) and { ~
No,~. ,~:_ ~ thcoe retat~om, hold as ,vd! u i ~ n &~'-
a h~gk, p~obabff~y of no dema,,d danng a ~,e: vJ
e.g ,, ~.an de,aand ~er day >; > o ~ s s o n d.~str:b,~, ed
{For °,n ~ a n , p ! e see :!9] }
(4)
> .:~ ~f ~.t:e rep!em~bment leac rote ~t~e!i ; c.
dxscre~ ~andom variable L w:~h rmrt~mt~m v~]ue
316 H. ~ernpe~me&ve / l m , emor) control using a sermce ~onstramt

/:~,:a a~d ~aximum value l~,ax, we have where ~ Z ' ) denotes the s~andardized nonraat dis-
t n b u u o n function.

Gamma &stribured demaoM

= Z e{Ni,)>~l~=Z}e{c=e}
and
~{,,s) =,}
~ma.,
= £ ?{N(s)=I-jIL=t}P{L=(},
= : . . . . ~.~. :.
These expres.xons c a : easily e, e', al~ated fc.r a
variety of continuous demand _istnbufions oc-
c,arrm~ it, inventor" practice, e g. 4orm,..,~' ~,,, ex-
ponermNly or gawma distfiLuted demand, as wet1
a for am a, b i m u y ~ iscrete demand di'~tribuuon, see
[17-201. In wh'~.t follows, we gave spacia! results for
tf~.e norma[ and the gamma distribution. A though
&use rcsu,t~ are well known, they are nevertheless
presented because some of these formulas .,;hNt be
referred to and modified with respect to the under-
shoot m the follovang secf~oa.
~1)
N o w let the demand £ w e a gamma distributmn
of order ne and with parameter X~. G a m m a dis-
tfibuted demar, ds are often found in prac6ee, see
[!4,18]. Define by F~(. ) its cumulative distrbufion
function. From the reproductivity property of the
gamma distribution it follows that the n-fo~:l con-
volution of th,. demand distribution is again
(~2) gamma d,st~buted with parameter X~ and o~ order
n- n a, see [16, pp. 57-58].
Thereb~re we can easi3y obtain the probability
dtstribuuon of the coverage N(s) by numerically
evaluating
P{ N(s) -- O} = 1 - Fa(s ), (20)
e(N(~) = ,, } = : ~ " ~ ( s ) - r ~ °+ ~ ( s ) ,
n = 1, 2 . . . . . ~21}
where F ~ " ( - ) ,s a gamma &stfibution with param-
eter ;k R and of order n - n ~.

?G'rm~dh ~,zswlbuled~wmand
3. The rdafiensNp be~,veen the duration of a
s t e e k o u t and {he e~stemer ,,rder ~vai{h~g time
Define bx F, ~ .} the cum;olattve dist~ibufi.,u
fv ",c~oa of the detained, v hwh s normally dismb-
m,~d "a~tl, mean ~' ;e and vanano, e~. Using expre.~- As has becn stated in expressto~ (2), &e dura-
ttort of a ~tockout s~.tuatton :~ only art upper bound
on the waiting time. tka~. a customer order experi-
;'i Nis)=0)= t. -F,(s) (~.q ences. The customer order w a t m g rune ~s--as
taarketing literature and practice s h o ~ - - t h e pro-
and from relation ~S) ~t foEows tl~at
dora;ham element in the physical distribution
? ( .V(s , = .~'} =F,~"(s}-F(:'+~'~s) service mi-~. Furthermore. knowledge of the
0 : = t , ~ '~, .. 1!4} customer order waiting tm~e distribution as a func-
tion of the reorder point ~s needed in the anatysis
D,zfinmg of muk~-,:chdon mve,ator) sbstems; e.g° when the
:o = (s - ~a), "%- (15) customer ~rder waiting ume of the upper echelon
c.mtral ~,.~ehouse) is (part of) the replenishment
:, = ~s - ,,. ,,. ~~/{vn -o~ ) (le} tead rune of the lower echelon (remote warehouse}
{5.t9]. Therefore, ~t is o1"te~_ preferaek to use the
aad
] - _
customer order wearing time as a constraint m
de~erm_;nme safety stocks.
Reeal~ that W the assumptions s t a ~ a nu
,~g ¢~m wp~e
costumer eree, a~I! watt !anger t h a q ~he day after
P( ~\q., ) = o} = ~ - ;%:{ 2.). i~8) :i~e end ot the ~ead time c o ~ e s p o a £ n g to . n o . .
P{;~: ~=,-~ = = ' ~ ' t ", "
rep!en:shment order p b c c d before ~. arty-ed, z~
v~aYan." ume of a cu3toraer order occurs, if kae
(?e~
c=verz~.c
. ,£ ~.;ae q~zaai~t3, s ~s k;~s t ~" , a n tile re-
 If. Tempelmeter / In~;e ~tor), control ugmg a ~e,z~ce constraint 317

plenishment lead tlme L Suppose the coverage is

N(s) --= n (n < I) days: then the demands (customer
orders) occurrhag during ume [n + 1, n + 2 . . . . . t]
of the replenishment lead time are delivered ~.f;er
waiting [t - n, t - n - 1 .... ,1] txme periods.
In Table 1 (ior a given replenishment lead nine
of l----7 days) aH one-period demands w~uch c~.n-
+
not be delivered from stock on hand immediazely,
given a coverage o f N ( s ) = n, are marked w i l t a
6~1~ °

If the coverage is three days. for example, then W

the demands occurring during time 1, 2 and 3 can
be delivered without any delay. In Table 1 these :<--
demands are marked with the sign * . Thus the
number of one-period demands experiencing a
u,3
waiting time of zero days is 3 (see last column in v/
Table 1). The demands which arrive during the
2~
time periods 4, 5, 6 end 7, however, have to wait
e<
until delivew for 4, 3, 2 and 1 da5 s, respectively.
In this example g~ven, the p °obability that the
situation described occurs is _given by P{ N(s) = 3 }. ,#

N o w by smmnation over all possible values of the p

coverage N(s), multiplying the number of one

e~
p~.riod demands experiencing a waiting t~me W~ =
w by the respectwe probability of the coverage and
summang up (column-wise sumnmtmn in Table 1 ),
we obtain the expected n~amber L/(W~ = w) of
one-period demands that witl ~-'a,t a t:me span of
[w--- L ? - I . . . . . 0] days (see last row m Table t).
~here FV: denotes the wamng ume of a cus~o~,,~r
order thnt a:r:vco ~c~ when a replenishment order --7
V/
is outstanding. For example, the expected number
L
of one-day demands wmtmg until dehv,er~ ~or
w = 4 days is gaven by P { N ( s ) = O } + P { N ( s ) = r~

1} ± P { N ( s ) = 2} +P{N(s)= 3} = P { N ( s ) ~< 3}
(see last ro,~ in Table I).
el'
So far, we have treated the one-day demand
quanti)y as an enter), tn practice however, the
dema:°d quantity per day consists of a random
number A of independent customer orders, each
E
with a random demand quantity Denote by E { A } 5
~7
the expected number of customer orders per day
and by V{ A } ks variance. If all orders arriving the
da3, m which the first backorder occurs are counted
as being backo:dered, the expected number H{ g/.
= ~ i s~ L = ;} o~ c~.stomer orders zha: ~ave to
wait ~o~ a time ~V,!s)= w up t.5 complete d e h v e u
:~ g B e n by (see b o t t o m row ~_n Tab!e ~)

.<.~-,,, i k = : ) .
b~ ~ e "~ ~ ¢q ~ "=2 ~ ,~D t~
w = i, 2 . . . . ? (22)
 H. Toape[r,~e,er ," Inge~toO covtro[ u~i~g c, aer~ce cos~s~ramt
Customer orders, however, whic~ arrive before
the ir~ventor~ has become out of stock are de-
livered without any dday. Their expected number
~s gwen by
H(glq =O}s, L = I ) = E { A}[IP{ N(s)>II]L= l}
+ I;
(23)
which is the sum of the one-day demands with no
deli~e~ ~ !ag given a coverage N ( s ) = n (see last
column of Table 1) mult~ptyed by the probabNt>
of the caverage P{N(s) = n } (see first column of
Table i).
In forrmflas q22) and (23) we neglecz the fact.
that during the da S s~ock on hand falts to zero.
some customer orders ne~,ertheless may be de-
livered ~athout delay'. In the above equations,
however, ali customer orders arri~ang per day are
treated as either being dehvered or as being com-
pletely backordered. Therefore the service t,mes
computed are an over-esumatmn of the reai service
t~.me.~ oh,erred by the customer~.
For ~. more correct bookkeeping of the waiting
umes, ~e ha~e to Iook at the random process
generated by the number A, ( t = t, 2 . . . . ) ot
customer orders ar ~ m g per day Let Ao be the
number of customer orders, which axe completely
dehvered the da>, ~tock on hand fvAis to zero, and
le~ 4 be the m~mber of customer orders arn~mg
tha~ d&,. Much have m be backorde~'ed
If the replemsla-nent order quaauty is Iarge
compared m the expected demand quantity of a
single customer order then, using arguments from
renew.a1 theory, we can characterize Ao and A t by
probabihty d~stfibut~ons which have, a a limiting
value, the expectations, see [4,6}
E(Ao}=(E{A}:~ V{A})/'(2E{A}} (24)
and
L ,- ng ~esc cupee.,~.on~. ~,c can spht the customer
o:~ ors am, mg the da~ s,.ock o~: haunt ~alis to zero
as fo:lowso E{Ao~} cas=omer order~ v.~;: be d ~
hvered ~mmediatel~, wkeie E{A~ } o~ders ha"e :o
wai~.
Now. m a m p d a t i n g expression (22). we obtain
H ( ~ q = w ts. L = ~) = E { A } P { _~:(s)
<t- w- 1~L=t} +E{A,}P{ N~.)= t-w}.
. , = 1 . 2 .... 1-1, (26)
~ ( w ~ = w L~, L = t) = e { & }p{ N ( s ) = o},
w = t. (27)
The first term on the right-hand side of expression
926) denotes the demands of those days, when no
customer order can be fired while the second term
denotes the expected number of customer orders
experiencing a waiting time, that arrive the day,
when stock on hand falls to zero. Expression (27)
denotes the expected number of customer orders
arriving the first period of a replenis~hment lead
time, that are backordered, when the coverage ~s
N(s) = O.
The expected number of customer orders that
are dehvered without delay is grven by
= s { ~ }[l~{ N ( , ) ~ ttL = t}
t-1
+ Z ,,p{n(,)=,~}]
+ e { a0 }e{ n ( ~ ) < t - ~_]. (28)
E~presston (28} d:ffer~ from ~_oj~9
~-~ only by the
last term, w~uch counts for at! customer orders,
that are deh~ered e, Jthout dots> the day stock on
hand falls ~o zero. As P { N ( s ) ~ / - ! } tends to
decrease vath increasing service leveI {short ex-
pected customer order waiting drne, which leads to
a high reorder F 3int), m many practtcM inventory
settings the difference ~s expected to be very small.
F_~press~ons (26}-(2g) can be transfon'ned mm
the conditional wobabihty distnbutmn of wamng
t~me ~-g~ wi~h respect to those customer orders,
that arSve during a replemsbment lead t~me of
length L
The condit~o-m! probabihty distnbuuoa of the
wmnng nine of ~hese customer orders as gwen by
+ = O, ! .... :. (29)
 H. Tempel~ve~.e~ / tneeaIa 0 control u~o,g a ~ovlce cons,,,a, nt
So far we have &scussed ~he waiting time of a
customer order, wt-ach occurs during a ~'ep!emsh-
ment lead time of ieagth L In general, a replen~.sh-
ment lead time is not identical to a replenishment
cycle, which for an (s, q)-system has expected
length E { P } = q / E { R } , where q is the (hxed)
order quantity and E { R } denotes the expected
demand quantity per day.
In fact, if we assume, that there is at most one
replenishment order outstanding, then the re-
plenishment lead time is only a (posstbly small)
part of a replenishment cycle. In t_his case, the
condmonal probability that a randomly selected
customer order arrives just during a replenishment
lead time of teng~h l is given by
P {Customer order occurs during a replenishmev t
lead time of length l } = I / E { P } = lE { R } / q
During the remaining part ( 1 - I E { R } / q ) of
the typical replenishment cycle the customer order
waiting u m e is always equal to zero, as by dehm-
lion there is enough stock on hand to dehver nit
demands.
We are now able to derive the unconditional
probability distnbutmn of the waiting time W(s)
for a customer order, that occurs at any arbitrary
point m ume, see [17j8].
For a gwen lead ume of length l, mu!Uplymg
(29) by (30} and for VY{s)=O, adding the term
~! - !E~, g } / q L we have
P{ W(s)=OI L = I }
=,ff R }/q
+ - le{ }Iv)
and
P{w(,t=wlL=l}
= P{ G ( , ) = = l}lE{ R J/q,
w = 1, 2 . . . . . L
Now, treating the lead ume as a random var:a-
b!e. we obtain
- : f ( R J / e ! P f L =~ ~
319
and
P{ W(a) = w}
= E
f = In,,~
.P(r=t}, w = 1 . 2 . . . . . Ira.,. (34)
The results presented so far have been cerived
under the assumpuon, that there is at most one
replenishment order outstanding. Now, if at least
one replemshment order cycle duratmn p ~s shorter
than the corresponding lead time l, then tbJs as-
sumption w~tl be violated. Akhoug_h m physical
distribution practice flus situation will be very
rare, we shall now discuss the conditions under
whmh expressions (33)-(34) will hold as well. In
the current context, two problems arise" (1) What
(30) happens, ff at the beginning of a replemshment
lead time stock on hand is less than the inventory
p o s m o n ? (2) What happens, d the reDem~hment
lead ume is not a small part of a replenishment
cycle, eg. E { L } ~ E { P } , e.g ff there are more
than one replenishment order outstanding a m u t t a -
neously'~
If there are akea~y several orders ou~standlng
i m m e & a t d y before the placement of a new order
~say at t~me t~, then under the addmonal as~ump-
uon of no orders ~rossmg all replemshment orders
placed so far wP! arnve earlier than the orde.~
under cons~deramn (wh,ch w~l arnve at t~me ~ +
/). tn th~s case not sto~k on hand. but the :w.en-
to~y posmc~n s ( = ca hand + on o r d e r - back-
orders) ~s :ned ~ f6' tho demands dur'pa the [ca(1
Ume of the last order placed (that ~s demands
d u n n g time It° ¢ + t]) & prob!em might be caused
by the fact that the on-order part of the inventory
pos~t~on ~s rmt a a~Mo~ at dec beg, atut~g o~ the
rep~ernsismem lead ume if, at has been stud~ed m
the foregoing anaI;~s~s. However, m general the
probabihty ts very h~gh tkat these orders arnve at
(32) early stages of the iast order rep~emshment lead
tm~e. Therefore. w~th respect to ser,-me levels used
m m~emory p~acuce, the results g~en above may
be e/.pccted to hotd
C o n a d e r m g the second questxon~ wha; happew,
ff the~e are ,sore d~a~, one rep~er.~ahment .rder5
no io?~ger a mobaofitty because ~_~ may assume
vaiues grea~er ,b- , ~ - v o~ t / v-.; -~'t <
..... n "~ The p_~eo~e
t33.~ t o aCCOtd~ t o g {~:g , ~ ¢ r a g e IIuEIi~'~F ©~ .e&O ~v~-se5
320 H. Te;apCme~e~ b~te,,to O' torero1 ~ e n g a sercwe comlramt
running per ma average replenislunent cycle, t i
there are several orders outstanding, then we ob-
serve overlapping replenishment 1cad times.
If t<~E{P}, then t / E { P } counts for the re-
duced exposure to risk of becoming out of stock
during an average repIenishment cycle. Contrary.
if lead time l is greater than E{P}, I / E { P )
counts for the mulupI:~'ed exposure to khe risk of
becoming out of stock. Tins correspovds to the
"expected number of replenishment c3clcs per time
period" as used in inventory literature, see [11, p.
261]. In the tatter case. the term I/E{ P) will be
greater than one and teads to a sNft in the proba-
blht3 d~stnbuv_on P{W(s)}, which reduces the
p r o b a b ~ t y of no wmt occurring and distributes
the amount reduced over the rest o* the probabil-
~,y distribution. So despite the dfffenr, g mterpreta-
tton of t/E{ P} f3!)-(32) ,MII hold m both s, tua-
tlOnb.
it must be guaranteed, hov, ever. that (31) al-
ways rema'ns greater than 0, that is the conditio~
~ " { W ( s ) = 0 I L = ! } > . > - 0 must hold. "rNs ~il! be
the case as !ong as the reorder point xs such ~.hal
>- (35)
Th~s condmon states a lower bound to the
reorder pomL ,:~hxch ~s a funcuon of the expected
length of a replemshment cycle and the replemsh-
men~ lead ume."
Recat! that m denying the expressions (33)-(3a)
we have ~mphmtyt.~ assumed that the reorder point
,s iarge enough that the backorder part of the
m,.entory position may be neglected. There:ore,
the reorder point must be set such that the ex-
pected qummty short will not be too large com-
pared to the reorder pomu Tins assumpuon states
a second lower bound on tbe reorder point, wNch.
m general, wilt be t~gher than the first one. For
servme !e,ds cons, dered m physical distribuuon
m~,emor~ pracuce, however, the reorder point wfl!
always bc ~et such that both bounds wili not be
~tolated t v far.
he p r :,babd:ty d~stnbat~on d e m e d so far ho!ds
under the assumpuon, ~hat a =eplemshment order
of ~7e ,, . pta,_=d ,,hec tee ln~entp[W posn~on >
e;:a~d, at a. in tlu5 case v e can use ~he ,.vho~e
quand~2, s to f:]t ~he de~vand~ e~'cunmg during the
replems~m~ent '.end ume. in mventow pracuce,
hev:e,.e~, this ~ s u r a p u o n m general ~s violated--
e ~en w!~en c,~2u~uoa~ le~iev _~s ~ e I f g r ~ e d - - b e -
cause of customer order quantities that are greater
than one unit.
In tbds case. a replenishment order may only be
placed, when the inventory position has already
fallen below s, that is when an undershoot (see [ i i ,
p. 2!9]) has appeared.
For the case of continuous demand quantities
considered, the probabdaty dastnbutlon of the un-
dershoot U i s - - a s a 1Daiting value, that is for large
values of q--grven by [4, pp. 347-348; 6, p. 106]
P { U ~ u} = 1 - ( 1 / / , R ) £ ~ [ 1 -FR(r)]dr (36)
where Fp.(r) denotes the cumulative probabihty
distribution of the one period demand R, whmh
has mean fir and variance a~.
The expected value of the undershoot is [4. p
348]
E { U } = ( ~ + ~ )/{2iua), (37)
and ~ts vanance is
"~ 2
(38)
where P-3 denotes the third central moment of the
demand distnbuuon
No,a, if the mvemoly posaion ~s reviewed pen-
odlcally, 1.e. at ~he end of each day. then the above
stated procedure ~'or deterrmning the customer
order wamng t~me d~stnbut~on shoaM be modffmd
as fol!o,vs F~r,,t the counting process should be
shifted one ame period backwards. This means
that the undershoot is interpreted as the demand
of ",.he (hypothetical) first period of the rep~_emsh-
ment lead t:me
For the case of negative exponentm!ly distrib-
uted demands, tee d~smbuuon of the tmdershoot
is ~_denttcal m ~ e demand distribution [7, p. 274].
tf the one-period demand quantity follows,say a
normal or a gamma distribution, ho~,ever, the
demand and undmshoot dastnbutmns ~.'ill differ.
The procedure far determamng the cuatomer order
wamng rune e, str~buuon, as ottthned above, ~s
based on the fact that ~t ~s easd:y possible to
detem~me *.he ,-4c~:J convolution of the demand
mstnbuuon.
ff we interpret h e undershoot as a soeem~ first
pex-ioa demand. 'demands' are no longer idenu-
c a ~ distribute5 h order to use tee reproduc~n,,_t5
g~ope~t~ ef t:~e a=dedymg &:m,aa3d d~stnbat:onso
 H Tempelmeter / Inventory control using a sermce constraint
we have to make two assumptions. First, we com-
putationally treat the undershoot distribution as
being of the same type (i.e. normal or gamma) as
the demand distribution. Second, based on the
first assumption we adjust the critical parameters
of the undershoot distribution such that the n th-
fold convolution may easily be calculated and the
reproductivity property may be employed.
The necessary approxamations of the under-
shoot distributions are as follows. For the case of
normally d~smbuted demands, we replace expres-
sions (15), (16) and (17) by
z o = (s - b'.u) / ~ u , {39)
z~=[s-(n-1)~-~v]/~(n-l)o~+ @ {40)
and
za = [a - n # R - l * u ] / ~ + %z,, (41)
respectivdy.
If the demand has a gamma d,stnbutwn, let
Xu=X R (42)
and
n u = E{ U } A,~ (43)
Now, the cumulaave demand dunng tame [0, n]
can be treated as hawng a gamma distnbu~mn
w~th parameter X~ and of order
nr=E{U}X~+nn~ (44)
If the demand d~stributmn is discrete, then the
distribution of the undershoot may be evaluated
numerically.
We have tested these approximatmns of ~he
ur, dershoot distribution for normally as well as
gamma distributed demands using a variety of
parameters, see [17,18,i9]. We also tested problem
settings, in winch there we several replemshment
orders outstanding, a situation that witt appem on
a regular basis, when the expected replemshment
lead v_me length E{ ~ } ~s greater than the expected
reolemshment order cycle ~{ Y } The inventory
except%n, the wait:rig ehne distribat~ons observed
she,red very c!os~ agr~eeaer:t v~:d~ the :heorctieaI1y
de~ved .a~>~qg te~r:e di~mbv~,o~. S ~ e e~amples
shali be eresented ~c d~_¢ae> t see dO:~o
321
4. The determination of the re~,rder p ~ t subject to
a cons~rah~t wRh respec~ to the customer order
waR,rig time
Having determined the uncon&tmnal probabil-
it?/" &stnbutmn of the customer order waiting time
as given by expressions (33) and (34), we are now
able to calculate the reorder point subject to a
constraint (a) on the expected customer order
wa~ting time and, alternativdy, and (b) on the
probabihty Prom that the customer order wamng
time is less than a specffmd amount w.~,
(a) Constraint on the expected ,ustomer order watt-
mg time
Just as the expected quantity short, the ex-
pected customer order wamng nine is a convex
function of the reorder point, Therefore vath re-
spect to a constraint specifying a maxt_mcm ex-
pected customer order of wamng time, we have to
find the smallest reorder point ~ such that the
constraint will not be vmlamd TbJs problem n'my
be stated as follows
Mm [slE{W(s)} ~ wq {45)
. h e r e w ~ denotes the dented serwce ~v, el as
expressed m terms of the e,~pected custoravr order
wmdng t~me
This problem ma, be solved by mean.-, o~ an>
approprmte search method We u:,ed a v~:,~nt of
btsectmn search, see [13. pp 58-59, 2 PP
173-182]
Consider a numerical example ~ased on ernp~r>
eal data. From the order file of a Germa,~ food
company's reg~onat distnbutmr~ center .,.e de-
terrnmed (a) the empmcal d~stnbution of the -mine
her oJ customer ordefs per day for a gtven product
and (b) the empirical distribution o_f t> ~ ,>~der
quam,.ty per customer order Combtmng these ?wo
dlsmbtmons, ~e obtained the probability d~s~r bu-
tton of the daffy demand quanuty wt~ch ,. ~.-~ ap-
proxamated as a gamma d~stnbuuon w~th ?~.rameo
ter XR = 0 00884 and o~ order ~*R= 1 33476
The expected demand quanuty per day ts
E { R } = t51 The expected number o! c,a~c, mer
orders arn'~ag per day ~s E{ A } = i2 277 ~nd ~A-,
time is assumed to be a random vanab~: "
d~screte p:obat-,b~3, &st:?b~tc:cp P i L = a0~ 6
~.~ = ~ = 0 3 a~.d _P'~L=!%}-=,
plemxi~ment o-_,de: ov.a~_t?F, was set ~ ~ -~ ~"52'
322 H Tempe 'mezer / Ineemorj, ~omro[ using a se~otte o~,~atratut
Table 2
Theoretical S~mulation
results resuRs
o.c'9~4
P{ ~t~ = w }
0 O 9-469 0.9514
! 0 0260 0.0216
2 00146 0 0139
3 0 9074 0 0073
,~ 0 0033 0 0035
5 0.0013 0 00t2
6 0.(1004 0.12O07
7 0 0001 0 00.33
8 0 ffdOl o 000t
"r.kn i~ equfi,alent to an a~,erage order c)cie E{ P }
= 5" da)s. Note that q is tess rhan half of ,dw
expected lead t~me demand. Inventor5' on hand was
checked at the end of each day
A waiting time (as a measure of service level)
w = = 0.1 was specified. Using (33) and (34) we
obtain s,~,(w* = 0.10)= 2t64 (rounded to integer
vMue}o Not~ that s > q.
m order to test tins result wh:ch is based on the
a~Frox~mat:on of ~he undershoot, a SL.~.~-s:mula-
Uo~ model [see i2] of the underlying daffy review
inventoD process was :un over a smm~afion pmmd
of 10000 days. Table 2 presents ~he results of the
snnata~en a_nabs~s as well as the c o r r e ~ o n d m g
d~eoret~eal values ~bich a, ere derived using
(33b-(3a) and the ~pr~roramatm-" of the . . . .
shoot distrtbmmn by a ganm~a dastnbu~:on.
In the above example, there were a maxmmm of
6 replenishment orders outstanding samultaneousty.
Table 2 shows a v e ~ good coh~cidence of the
resuhs stmutated and these derived by uze of the
expressions Nven above. Observe, that part .of the
difference between beth probabi~ty d~stfib'ut~ons
g~ven it: Table 2 is due to the approximation of ~ e
(d~screte} oneopenod demands by a (continuous)
gamrna d~stnbutmn
(b) Ce~,'~st:amt o, rhe ~ robab~h9, H~a~ the cusfomer
o:'de.~ ~vam~rg ~ Ie~, ",an a ma~agement-spec@ed
As i~as been me:3~oned ~.bo,.e, ta~ en~o@
management often speciges an upper bound '~G~
on the customer orde; ~ wai~mg ~me in phys~ca!
&ambutmn literature, we often find s~a:er~aee~s
::ke. °'98% of o:~: customer oNers sha~ be d >
Table 3
T~zeoredcat S~malatmn
:esutts results
w P{w= .,} ~'(w= w}
0 0 9254 0 9328
t 0 0533 0 0470
P{ g " < 1} 0 9787 0.9798
livered within 2 days". A constraint of tins type
may be taken into account by solving the follow-
ing prob!em:
Min [s'tP{W(s)~wn.~}>.>.p.~] (46)
where V~m~.~denotes the specified customer order
wa~ting t~me and p ~ denotes the management-
specified percentage of customer orders which shall
be filled within maximum tame win=.
Consider the same example as above, but now
wi~h different lead time and replemshment quan-
tity. We assume the replenishment tead time to be
dlstributed as fallows: P { L = 1} = 0.4, P { L = 2}
= 0.3 and P{ L = 3} = 0.3. The replenishment
order quantity is q = 302. This leads to an ex-
pected reptemsl~men~ order cycle of length E{ P }
= 2 days.
t h e solutmn of problem (46) fol file above
gn, en example yields ~m~(~%~= t~ pm~=0.978)
= 675. The corresponding probability distributmn
and the s:muiatmn results are presented m T~b!e
3.
4. gummar~
In th~s paper we have presented an anaIyticaI
procedure fog the de~er::~:atton of the probab~hty
distribuuon of the customer order waiting time as
a function of file reorder level m a (s, q)-invemory
system, where inventory position is checked only
at the end of each day.
The model holds under arbitrary demand dism-
buttons 0.e. normal, ganmla, exponem~at, Potsson)
as wet! as under stochastic lead t:me conditmns.
Computer sm~ulatmn resuks based o~ empirically
obser,md &stnbat;ons of the number of cus,ome:
orders pe~ day end tbe demand pe~ cvs~omer order
have shown a ~ r y b~gh agreemen~ wita '~h~m~del s
results. ~A&oegb fi~ nmnencal e=ampks gb~,:~.n
represen~ to z cerium cx:e::d ~WG2SI (Or ~';id)
 H Tempdmeier / hlventor? control using a service constraint
cases" (most real life physical d~stribufion inven-
tory pofic~es use order quay trees considerably
greater than the expected lead time demand) the
probab~hty distributions derived show strong
coincidence with the waiting time distributions
observed from the s~mulatmns
W~th the results presented, the reorder point
may be calculated subject to a management-spect-
fled constraint on the expected customer order
waiting time as well as on the probab:hty of ~he
customer order wamng time not exceeding a green
time hmit. Although we have considered an
(s, q)-inventory system with fixed replemshment
order quantity, with some modifications the results
given may be ,easily adapted to a heurisuc (so S)-
policy with S = s + q.
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