Katy S.

Azoury(1985)- Management Science

Pradipta Patra 1st March 2011

Introduction

This is an extension of the work by Herbert Scarf(1960).The inventory model by Azoury takes care of situations where the functional form of the demand distribution is known but, one or more of the parameters is unknown. Azoury has extended Scarfs work by providing an explicit form for the optimal Bayesian policy which can be computed with the same eort as in cases where the demand distribution with parameters is known.

2
2.1

Depletive Items
Assumptions

Single item, periodic review, depletive items (consumable items)inventory model. Finite planning horizon inventory model. Linear ordering cost, holding cost, shortage cost. Holding cost and shortage cost for a period depends on the amount of inventory at the end of the period. Lead time is zero. Excess demand is backlogged. Demand in each period are independent and identically distributed (iid)continuous random variables. The family of distribution to which demand belongs is known, but one of the parameters is unknown. The unknown parameter has a priori probability density function (pdf). This pdf is taken as a conjugate prior. The demand probability density function is scalable using function of sucient statistics as the scaling parameter. So, the demand pdf is written as product of scaling parameter and the normalized pdf. The scaling parameter for the next period (n+1) is updated using a real valued, continuous function with nite expectation. This function takes the normalized observed demand in period n as the input parameter. So the scaling parameter for period n + 1 is written as product of the function mentioned above and the scaling parameter for period n.

2.2

Results

The objective is to minimize the expected discounted cost from period n to end of horizon. The expected discounted cost is function of two variables- initial inventory level at the beginning of period n and sucient statistics for period 2

n. Result 1: The sum of expected holding cost and shortage cost for period n is scalable using function of sucient statistics as the scaling parameter. The original function with amount to order and sucient statistics as input parameters can be expressed as product of scaling parameter and a normalized function of single variable i.e. the amount to order. Result 2: The expected discounted cost from period n to end of horizon is scalable using function of sucient statistics as the scaling parameter. The original function with initial inventory level and sucient statistics as input parameters can be expressed as product of scaling parameter and a normalized function of single variable i.e. initial inventory level at the beginning of period n. Additionally, the critical number or optimal order up to level for period n is also scalable using the same scaling parameter as above. Result 3: The normalized form of the expected discounted cost (from result 2 above)is continuous,dierentiable and convex function of the initial inventory level. Result 4: Since normalized form of the expected discounted cost is function of single variable, we can compute the critical numbers or the optimal order up to level by recursion. From this we can compute the critical number for the original or non normalized problem. The optimal policy for a period is to order up to the critical number if initial inventory is less than it or do not order if initial inventory exceeds it.

2.3

Example

The above results hold for the following distributions: demand follows Uniform and a priori is Pareto; demand follows Weibull and a priori is Gamma; demand follows Gamma and a priori is Gamma.

Non Depletive Items

Inventory for Non Depletive items mean supply systems where all items that fail can be repaired. The inventory model by Azoury deals with the spare parts inventory that is maintained to replace the failed items in repair. In this reparable inventory system shortages may occur when there are no parts on hand to replace an incoming failed part (there may be parts in order or parts in repair). Otherwise the inventory level in reparable inventory system is nondecreasing. The demand in this inventory system is caused due to failure of parts that need to be repaired or replaced. The probability distribution of this

failure process is unknown. But, this distribution does not change over time and can be ascertained from failure data.

3.1

Assumptions

Bayesian periodic review model with single echelon structure. Positive repair time, positive order lead time with repair time order lead time. Lead time and repair time are deterministic. Linear ordering cost, holding cost, shortage cost. Excess demand is backlogged. Demand in each period are i.i.d. continuous random variables with known distribution but, one of the parameters unknown. The unknown parameter has a conjugate prior. The demand probability density function is scalable using function of sucient statistics as the scaling parameter. The demand pdf is expressed as product of scaling parameter and the normalized pdf. The parameter of normalized pdf = (normalized observed demand - location parameter). The scaling parameter for the next period (n + 1) is updated using a real valued, continuous function with nite expectation. The input parameter for this function = (normalized observed demand in period n - location parameter). So the scaling parameter for period n + 1 is written as product of the function mentioned above and the scaling parameter for period n. The location parameter for the next period (n + 1) is updated using a real valued, continuous function along with location and scale parameter for period n.

3.2

Results

Due to positive lead time, order cannot be placed in any period > (end of horizon - lead time). Similarly any shortages occurring before order delivery is not inuenced by the ordering decision. The objective is to minimize the expected discounted cost from period n to end of horizon. Expected discounted cost function has inventory position of spare parts and sucient statistics as the input parameters. Inventory position of spare parts = (on hand inventory + in repair + in order - backlog). Result 1: The expected discounted cost from period n to end of horizon is scalable using function of sucient statistics as the scaling parameter. The original function with inventory position of spare parts and sucient statistics 4

as input parameters can be expressed as product of scaling parameter and a normalized function. The input parameter for this normalized function = (normalized observed demand in period n - location parameter). Additionally, the critical number or optimal order up to level for period n can be expressed with the help of scale parameter, location parameter and the critical number for the normalized function.