INVENTORY MODELS

for
a Time Varying
Demand Pattern
=
Advance Research Operational
Practical Situations
Multiechelon assembly operations almost always vary
appreciably with time.
Production contract requires that certain quantities to be
delivered on specific dates.
Items having a seasonal demand pattern. (Artificial
seasonality can be introduced by pricing or promotion
actions)
Replacement parts for an item that is being phased out of
operation. Here the demand rate drops off with time. (Class C)
Items with known trends in demand that are expected to
continue.
Parts for preventive maintenance where the schedule is
accurately known.
The Choice of Approaches
Lot sizing model with EOQ (MRP)*
The WagnerWhitin (WW) Algorithm
WagelmansHoeselKolen (WHK) Algorithm
SilverMeal Heuristic
Least Unit Cost Heuristic

* Explained in a certain lecture

Wagner-Within Algorithm
Denote the fixed ordering cost and the holding cost in period t
by K
t
and h
t
, respectively.
Specifically, if C
t
is the per-unit purchasing cost, then the
analysis requires that C
t
+ h
t
C
t+1
for all t.
It is not necessary for all the periods to be of equal length.
d
t
is the known deterministic demand in period t.
x
t
to represent the inventory at the beginning of period t
before the order-placement decision is made.
For simplicity, assumed that lead time is zero.


...
y
t
is the on-hand inventory after the order-placement decision is made
and the order is received, or equivalent to x
t
plus the order quantity. Here
y
t
> x
t

The fixed cost is equal to K if y
t
> x
t
; otherwise it is 0.
Equivalently, the fixed cost as Ko
t
where



The purchasing cost is equal to the product of the unit purchasing cost C
and the order quantity y
t
x
t
.
Finally, the leftover inventory at the end of period t is y
t
d
t
, and the
corresponding holding cost is h(y
t
d
t
).
Combining the three terms, the total cost in period t as

>
otherwise , 0
, 1
t t
t
x y
o
) d h(y ) x C(y K
t t t t t
+ + o
The cumulative cost over the whole horizon is


Since the order quantity is non-negative, y
t
must be greater than or equal
to x
t
in any period t. To ensure that there is no backlogging, y
t
d
t
.
If Z
1
(x
1
) be the optimal cost for the whole horizon given that the inventory
at the beginning of the horizon is x
1
, the formulation of the dynamic lot
sizing problem is as follows:

=
+ +
T
t
t t t t t
)} d h(y ) x C(y {K
1
o
The cumulative variable purchasing cost is independent of the
decision variables, y
1
,y
2
, . . . ,y
T
, The sum total of the order quantities over
the horizon is



Using the relationship, x
t
+1 = y
t
d
t
, substitute for y
1
with x
2
+d
1
, y
2
with
x
3
+d
2
, and, in general, y
t
with x
t+1
+d
t
in the above expression.
After the substitution, the above expression becomes:

=

T
t
t t
x y C
1
) (
Observe that all the terms on the right-hand side except x
T+1
are constant
and thus independent of the decision variables. The term x
T+1
is the
inventory remaining at the end of the horizon. This inventory is unutilized
and is wasted. Therefore, in any optimal policy, x
T+1
must be equal to zero.
This implies that the cumulative order quantity over the horizon is
independent of the decision variables. Since the total purchasing cost over
the horizon is equal to the product of this cumulative order quantity and a
constant C, the variable cost of order placement is also independent of the
decision variables.
Therefore, it is excluded from the cost function. The revised formulation is
as follows:
Solution Approach for Wagner Within Model
...
Assume that the inventory at the beginning of the horizon x
1
is equal to
zero.
For example, with T = 5






Wagner Within Algorithm
Define F(t) to be the optimal cost from period 1 through period t when
inventory at the end of period t is zero.
Also, define to be the minimum cost over periods 1 through t when the
inventory level at the end of period t is zero and period ts demand
is satisfied by an order placed in period s.
Cst can be written as the sum of the minimum costs incurred over periods
1 through s1 and periods s through t when x
s
= 0 and
The optimal cost over periods 1 through s1 is equal to F(s1).
The cost incurred between periods s and t includes the fixed cost incurred
in period s and the holding costs incurred in periods s, s+1, . . . , t.
The holding cost in period s is proportional to the inventory at the end of
period s, which is equal to the sum of the demands in periods s+1, s+2, . . .
, t. Similarly, the holding cost in period s+1 is proportional to the inventory
carried forward to period s+2 which is equal to the sum of the demands in
periods s+2, s+3, . . . , t.
...
Since inventory at the end of period t is assumed to be 0, no holding cost is
incurred in period t. Therefore, the total cost incurred in periods s through t
is equal to:

(2.1)
an expression for Cst by adding F(s1) to (2.1)


(2. (2.2)

if period t1s demand is optimally satisfied by an order placed in period v in
the t 1-period problem, then it is sufficient to consider periods v,v+1, . . . , t
as periods in which to optimally place an order to satisfy period ts demand
in a t-period problem.





...
For each of these choices, the minimum cost over periods 1
through t can be computed as:

The Algorithm
Step 1: Set t = 2, v = 1 and F(1) = K.
Step 2: Since an order is placed in period 1, we need to determine
whether to place an order in period 1 or in period 2 to satisfy period 2s
demand. When the order is placed in period 2, the total cost is F(1)+K
2
=
K
1
+K
2
since no inventory is carried into period 2. When the order placed in
period 1 is for d
1
+d
2
units, the total cost is
Choose the decision with the least total cost for periods 1 and 2. That is,


Set v = 2 if K
1
+K
2
< K
1
+hd
2
. Otherwise, v remains unchanged

...
Step 3. Consider the t-period problem. Given v, the demand for period t is
satisfied by placing the order in one of the periods v, v + 1, v + 2, . . . , t.
Compute using (2.2) and find


Step 4. Set t t +1. Stop if t = T +1. Otherwise, go to Step 3.