INVENTORY MODELS

第一

Advance Research Operational

 The ABC Inventory System
The ABC analysis is usually the first step that must be applied in
an inventory control situation.

100
Percent of total dollar value

80

60

40

20

20 40 60 80 100
Percent of total items
 Importance of Inventory
• The decoupling function
• Storing resources
• Irregular supply and demand
• Quantity discount
• Avoiding stockouts and shortages
Planning on what
Forecasting Controlling
inventory to stock
parts/product inventory
and how to
demand levels
acquire it

Feedback measurements to
revise plans and forecasts
 Inventory decision
• How much to order?
• When to order?

• The general inventory problems :

1. Periodic review case. Receive a new order of the amount specified
by the order quantity at equals intervals of time.
2. Continuous review case. When the inventory level reaches the
reorder point, place a new order whose sixe equals the order
quantity.

 total 
   purchasing   setup   holding   shortage 
 inventory             
 cost   cost   cost   cost   cost 
 
Total cost
per year
Total cost

Minimum
Holding (carrying) cost
total cost
Purchasing cost
Setup (ordering) cost
Penalty (shortage)
cost
Order quantity
Optimal order
quantity
 DETERMINISTIC MODELS
Single-item Static Model (EOQ)
Assumption :
1. Demand is known and constant
2. The lead time (the time between the placement of the
order and the receipt of the order), is known and
constant.
3. The receipt of inventory is instantaneous.
4. Quantity discounts are not possible.
5. The only variable costs are the cost of placing an order,
ordering cost, and the cost of holding or storing inventory
over time, holding or carrying cost.
6. Orders are placed so that stockouts or shortages are
avoided completely.
Inventory
Order quantity = Q =
level Maximum inventory level

Minimum
inventory
0
D
Annual ordering cost  Co
Q
Q
Annual holding cost  C h
2
2 DC o
EOQ  Q* 
Ch
 Inventory costs in the EOQ situation
(periodic review)
• The objective of most inventory models is to
minimize the total costs (ordering and
carrying/holding costs).
• Average inventory level = Q/2
• Q = number of pieces to order
• EOQ = Q* = optimal number of pieces to order
• D = annual demand in units for the inventory item.
• Co = ordering cost of each order
• Ch = holding or carrying cost per unit per year.
 Determining when to order
(continuous review)
• Reorder Point (ROP)
= (demand per day) x (lead time for new order in days)
= DxL
Inventory level (units)

Q*
Slope = Units/Day = D

ROP (units)

Time
Lead Time = L (Days)
 Using safety stock (buffer), B
Reorder point
B + Q*

B + DL

Buffer

L Time
• Suppose that f(x) is the density function of demand during lead
time L. When it is required that the probability of running out of
stock during L must not exceed , then the buffer size B is
determined by P{x B + DL}  
…
• Example : For known that daily demand is normal distributed with mean 
= 100 and standard deviation  = 10, determine the size of buffer stock
such that the probability of running out of stock during lead time is at
most .05.
• Answer : For lead time equals 2 days, since the daily demand is normal
than the lead time demand xL is also normal, with mean L = 2 x 100 = 200
units and standard deviation  L  2 x10 2  14.14
• It then follows
P{xL  L + B}  
 x  L B 
P L  
  L L 
 x  L B 
P L    .05
 L 14.14 

• From standard tables, this gives B/14.14  1.64 or B  23.2

 EOQ without the instantaneous receipt assumption

• This model is applicable when inventory continuously flows or

builds up over a period of time after an order has been placed
or when units are produced and sold simultaneously. (called
production run model)

There is no production during

Inventory level
this part of the inventory cycle
Part of inventory cycle during
which production is taking place
Maximum
inventory

Time
t
 Annual cost for production run model

• Q = number of pieces per order, or production run

• Cs = setup cost
• Ch = holding cost per unit per year
• p = daily production rate
• d = daily demand rate
• t = length of production run in days
• Total produced = Q = pt or t =Q/p
• The maximum inventory level = pt – dt = Q(1-d/p)
• Average inventory = Q/2(1-d/p)
• Annual holding cost = Q/2(1-d/p)Ch
• Annual setup cost (replacing ordering cost) = (D/Q)Cs
• The optimal production quantity is achieved at annual holding cost =
annual setup cost
2 DCs
Q* 
 d
Ch 1  
 p
Single-item static model with price breaks
Quantity Discount Model
• The total relevant cost =
material cost + ordering cost + carrying cost
Total cost = DC + (D/Q)Co + (D/Q)Ch
where
D = annual demand in units
Co = ordering cost of each order
C = cost per unit
Ch = holding or carrying cost per unit per year
Ch = IC (I = percentage of the unit cost C)
Total
cost $ TC curve for
Discount 1 TC curve for
Discount 3

TC curve for
Discount 2

EOQ for
Discount 2

1000 2000 Order quantity

2 DCo
• For each discount price ( C ), EOQ =
IC
• If EOQ < minimum for discount, adjust the quantity to Q = minimum for discount.
• For each EOQ or adjusted Q, total cost = DC + (D/Q)C o + (D/Q)Ch
• Choose the lowest cost quantity.
Price Discounts: Forward Buying

• For a trade promotion, it is often that a

supplier give a short-term discount policy.
• The supplier offers incentives in the form of
one-time opportunities to sell materials at
reduced unit costs or perhaps notifies the
buyer of an upcoming price increase and
offers one last chance to order at the lower
price.
• Consider that instead of a normal price of $C per unit, a supplier offers a one-time discount
of $d per unit. Then for a certain period the price is $(C-d)/unit
• After which the regular price will resume, the buyer must decide the quantity Qf to order at
the discounted price.
• The optimal forward-buying quantity is computed as follows:

Rd C
Qf   Q*
Hx(C  d ) C  d
…
• Where
R = unit demand per year
d = discounted amount of price
(ex : for one time discount 5%, at regular
price C = $3 / unit, d = 0.05x3 = 0.15)
H = unit annual holding cost
Q* = regular optimum order quantity
Multiple-item Static Model with
Storage Limitation
• This model considers the inventory system including n (>1)
items that are competing for a limited storage space.
• This limitation represents an interaction between the
different items and may be included in the model as a
constraint.
• Formulation: A is the maximum storage area available for the
n items and assume that the storage area requirements per
unit of the ith item is ai. If yi is the amount ordered of the ith
item, the storage requirements constraint become
n

a y
i 1
i i A
…
• Assume that each item is replenished instantaneously and
that there is no quantity discount, and further that no
shortages are allowed. The inventory costs associated with
each item (let Di, Ki, and hi be, respectively, the demand rate
per unit time, the setup cost, and the holding cost per unit
time corresponding to the ith item) should be essentially the
same as in the case of an equivalent single-item method. The
problem thus become (TCU = Total Cost Unit)
K D
n
hy 
minimize TCU( y1,...,yn )    i i  i i 
i 1  yi 2 
subject to
n

a y
i 1
i i A

yi  O, for all i
…
• It is necessary to check whether the constraint is active by checking
whether the unconstrained value
2 K i Di
yi* 
hi
satisfies the storage constraint. If it does, the constraint is said to be
inactive or redundant and may be neglected.
• If the constraint s not satisfied by the values of yi* , it must be active. In this
case the optimal value of yi that satisfy the storage constraint in equality
sense is accomplished by first formulating the Langrangian function as

 n 
L( , y1 , y  TCU ( y1 ,..., yn )     ai yi  A 
 i 1 
n
K D hy   n 
   i i  i i     ai yi  A 
i 1 
where  is the Langrangian yi
multiplier 2   i 1 
…
• The optimum value of yi and  can be found by equating the representative first
partial derivatives to zero. This gives
L KD h
 i i  i  ai  0
yi yi 2
L n
  ai yi  A  0
 i 1
• The second equation implies that yi* must satisfy the storage constraint in
equality sense 　 (eq. 1).

2 K i Di
y 
*
i
hi  2*ai
• Notice that yi* is dependent on * (the optimal value of ).
• For * = 0 gives the solution of unconstrained case.
• The value of * can be found by systematic trial and error.
…example
Item i Ki Di hi ai
1 $10 2 units $.3 1 ft2
2 5 4 units .1 1 ft2
3 15 4 units .2 1 ft2

 y1 y2 y3 a y
i 1
i i A

0 11.5 20.0 24.5 +31.0

-.05 10.0 14.1 17.3 +16.4
-.10 9.0 11.5 14.9 +10.4
-.15 8.2 10.0 13.4 + 6.6
-.20 7.6 8.9 12.2 + 3.7
-.25 7.1 8.2 11.3 + 1.6
-.30 6.7 7.6 10.6 - 0.1

Session 2
…
• For A = 25 ft2, the storage constraint is satisfied in
equality sense for some value of  between -.25
and -.30. (may be estimated by interpolation).
• The corresponding value of yi should thus yield yi
* directly.
• If A  56 (=11.5 + 20.0 + 24.5), the unconstrained
values of yi corresponding to  = 0 or the
constraint is inactive.
•
 Probabilistic Models
• The basic decision criterion used with probabilistic inventory
models is the minimization of expected costs (or equivalently
maximization of expected profit).
• The models discussed here is a continuous review model.
• In this model (in a probability approach), the stock is
reviewed continuously and an order of size y is placed every
time the stock level reaches a certain reorder point R.
• The objective is to determine the optimum value of y and R
that minimize the total expected inventory costs per unit of
time (per year)
…
• The assumptions of the model are :
1. Lead time between the placement of an order and its receipt is stochastic.
2. Unfilled demand during lead time is backlogged.
3. The distribution of demand during lead time is independent of the time at which it
occurs.
4. There is no more than one outstanding order at a time.

y
y
R y

Lead time Lead time

Cycle 1 Cycle 2
…
Let
• r(x|t) = conditional PDF of demand x during lead time t, x > 0
• s(t) = PDF of lead time t, t > 0

• f(x) = absolute PDF of demand x during lead time =
0 r ( x | t )s(t ) dt
• y = amount ordered per cycle
• D = expected total demand per year
• h = holding cost per unit per year
• p = shortage cost per unit per year
• The average setup cost is included in this model given by (DK/y),
where (D/y) is the approximate number of orders per year and K is
the setup cost per order.
…
• The expected holding cost is calculated on the expected net inventory at
the beginning and end of a cycle.
• The expected stock level at the end of an inventory cycle us equal to
E{R – x).
• At the beginning of a cycle (right after an order of size y is received), the
expected stock level is y + E{R – x).
• Thus the average inventory per cycle (hence per year) is given by
( y  E{R  x})  E{R  x} y
H   E{R  x}
2 2
• Given f(x) as defined,

E{R  x}   ( R  x ) f ( x ) dx  R  E ( x)
0
…
• Let S be the shortage quantity per cycle, then
0, xR
S ( x)  
 x  R, xR
• Consequently, the expected shortage quantity per cycle is
 
S   S ( x) f ( x) dx   ( x  R) f ( x) dx
0 R

• Since there are approximately (D/y) orders per year, the expected annual
shortage is equal to ( D S / y )
• The total annual cost of the system is thus given by
DK y  pD S
TAC ( y , R )   h  R  E{x} 
y 2  y
…
• The solution for optimal y* and R* is obtained from

TAC  DK  h pD S
  2    0
y  y  2 y 2

TAC  pD  
• From the first equation,  h     f ( x ) dx  0
y  y R
(1)
• and from the second equation,
2 D( K  p S )
y* 
• h (2)

• An explicit general solution for y* and R* is not possible in this case. It is necessary to do a finite number
of iterations. 
hy *
 f ( x) dx 
R*
pD
…
• In equation (1), at least
S equals zero, which shows that the smallest value of y* is ,a
DK / h when = 0 (or R  ).
result that is2achieved S
• Now at R = 0, equation (1) gives

^ 2 D( K  pE{x})
y*  y 
• and equation (2) gives h

~ pD
• It can be provedy*  yif 
that , the optimal values of y and R exist and are unique. In such a
case, the optimal value are h
computed as follows. Compute the first trial value of y* as
^ ~
. y y
• Next use equation (2) to compute value of R1 corresponding to y1. By using R1, a new trial
value y2 is obtained from equation (1). Next, R2 is computed from equation (2) by using y2.
y1  2ofDK
This procedure is repeated until two successive values / h approximately equal. At this
R are
point, the last value computed for y and R yield y* and R*.
example
• Let K = $100, D=1000 units, p=$10, and h=$2, and assume that demand during
lead time follows a uniform distribution over the range 0 to 100.
• To check whether the problem has a feasible solution, consider
^ 2 D ( K  pE{x}) 2 x1000(100  10 x50)
y 
h 2
• and  774.5

~ pD 10 x1000
y   5000
h 2
• Since ^ ~a unique solution for y* and R* exists.
• Now y  y

 100
1
S   S ( x) f ( x) dx   ( x  R) dx
0 R
100
2
(3)
R
  R  50
200
example
• From equation (3),

2 D( K  p S ) 2 x1000(100  10 S )
y*  
h (4) 2

• Where
 100,000  10,000 S
is as given by (3), from equation (2)

100
1 2y*
(5)  100
R*
dx 
10 x1000
• Equation (5) is used to compute Ri for a given value of yi, and equation (4) is used to compute yi+1 for a
given value of Ri or
y*
R*  100 
50
…
• Iteration 1
2 DK 2 x1000 x100
y1    316
h 2
316
R1  100   93.68
50

• Iteration 2
R12
S  R1  50  .19971
200
y2  100,000  10,000 x.19971  319.37
hence
319.37
R2  100   93.612
50
…
• Iteration 3

R22
S  R2  50  .20403
200
y2  100,000  10,000 x.20403  319.43
thus
319.43
• R
Since R2 and 100   93the
3 R3 are approximately equal, .611
approximate optimal solution is given by
R*  93.61 and y*  319.4
50