Supply Chain Models With Imperfect Production Process and Volume Flexibility Under Inflation

61
Supply Chain Models with Imperfect Production Process and

Volume Flexibility Under Inflation
Supply Chain Models with Imperfect Production
Process and Volume Flexibility Under Inflation
S R Singh* and Urvashi**
* Associate Professor, Department of Mathematics, D N College, Meerut, India. E-mail: shivrajpundir@yahoo.com
** Lecturer, Department of Mathematics, D N College, Meerut, India; and is the corresponding author.
E-mail: urvashi.sehrawat@gmail.com
Introduction
The issue of quality is mostly ignored in the classical inventory models. In other words,
it implicitly assumes that the quality level is fixed at an optimal level and not subject to
control. This means that sometimes defective items can also be produced during
production in the real production environment. Empirical observations indicate that the
production systems start producing imperfect units when the manufacturing companies
increase the production run time. At the start of production, the production process is
in control and the items produced are of acceptable quality. As the production run time
increases, the machine gets out of control and this affects the quality of production. These
defective items must be discarded, repaired, altered or if they have reached the customer, they
are sold at reduced prices and hence extra costs are incurred. Therefore, in determining the
optimal ordering policy, it is important to take the quality related costs into account.
Assuming non-zero defective items, several authors like Proteous (1986) and Cheng (1991)
extended the Economic Order Quantity (EOQ) models to imperfect production processes.
The effect of defective items on lot size is noted in the works of Urban (1992), Anily (1995),
Salama and Jaber (2000), Chang (2004) and Sana et al. (2007a).
In the above models, the rate of production is assumed to be inflexible. Schweitzer and
Seidmann (1991) assumed that machine production rates can easily be changed. Khouja
and Mehrez (1994) and Khouja (1995) extended the Embedded Platform Logistics System
(EPLS) model to an imperfect production process with flexible production rates. Sana
(2004) developed inventory models with volume flexible production for deteriorating
items and shortage. Khouja and Mehrez (2005), Husseini et al. (2006), Sana et al. (2007a
and 2007b) also discussed the volume of flexibility policy in production.
Traditionally, the supply chain inventory models consider different sub-systems. With
the recent advances in communication and information technologies, the integration of
2010 IUP. All Rights Reserved.
This study develops a supply chain from the perspective of both the manufacturer and the retailer.
The effect of imperfect production processes on lot-sizing is also considered. In this paper, a production
model that takes into account volume flexibility, weibull distribution deterioration rate and inflation is
proposed. Items of imperfect quality can be sold at a reduced selling price. The solution of the inventory
system is illustrated with the help of a numerical example. The sensitivity of some variables to changes
in the values of the parameters of the systems is also examined.
The IUP Journal of Supply Chain Management, Vol. VII, Nos. 1 & 2, 2010 62
these functions is a common phenomenon. Most enterprises are forced to extend supply
chain that can respond rapidly to customer needs with minimum stock and maximum
service level due to limited resources and globalization of market. The coordination among
the producer and the retailer is the key to success in supply chain systems. Several
researchers investigate integrated policies of the producers and the retailers. Rau et al.
(2003) consider integrated models for deteriorating items with different demand
assumptions. Hans et al. (2006) developed new methodologies to obtain joint economic
lot size in distribution system with a multiple shipment policy. Lo et al. (2007) developed
the model with shortages. Singh and Singh (2008a) considered the supply chain model for
deteriorating items and inflation. Singh and Singh (2008b) investigated the model with
exponential increasing demand rate in a supply chain.
In this paper, an attempt has been made to develop an inventory model with imperfect
production and deterioration at weibull distribution rate. The unit production cost is a
function of the production rate. Inspection costs for classified items is considered because
the compensation of decision makers who classify the product in three types (perfect,
imperfect and case of lost sale) should not be neglected. There are two types of demand
rates, the demand rate of perfect quality and the demand rate of imperfect quality which
are functions of reduction in selling price.
Formulation of Model
There are two stages in the manufacturer-retailer cooperation model. The first stage is the
manufacturer production system. The manufacturer purchases raw materials from outside
suppliers and distributes the fixed amounts to his storehouse at a fixed time interval. He then
sends the raw materials from the storehouse to production. The production plant produces
both perfect and imperfect items. The inspection section separates the perfect and imperfect
items at a cost I
c
per unit item (See Appendix for the Nomenclature). The inspection section
recognizes the appropriate quality items,
u
times of total defective items which are
appropriate for sale at a reduced price ) 1 ( ) 1 ( u o S times of defective item represents lost
sale. The density function follows the probability of imperfect quality of total production
( ) , 0, 0
t
f t e r t

= > s s
Hence, expected quantity of imperfect products at time t is
( ) (1 )
0
t
t
P f t d t P e

= }
As reliability of the manufacturing system decreases with time t, imperfect items
increase with time. Demand rate of imperfect items is
2 2
( ) (0 1, 0)
1
n
d d
o
o
o
s s >
which is
an increasing function. od
2
is a deterministic factor. The unit production cost is given by
63
( )
G
P R HP
P
q = + +
The second step is the retailers inventory system. Fixed quantities of goods are
distributed to the retailer with multiple deliveries at fixed time interval (Figure 1).
The raw materials inventory system is given in Figure 2(a). A supplier procures the
raw materials and delivers the fixed quantity, Q
w
to the manufacturers warehouse at a
fixed time interval. The manufacturer withdraws raw materials from the warehouse.
During the time period T
1
the inventory decreases due to both manufacturers demand and
deterioration. Manufactures inventory system in Figure 2(b) can be divided into two
independent phases depicted by T
1
and T
2
. During T
1
time period, there is an inventory
build up and hence deterioration becomes effective. At t = T
1
production stops at
maximum level MI
M1
. During T
2
time period, the inventory level decrease due to demand,
and deterioration reaches at zero at t = T.
Figure 1: Logistic Diagram of the Model
Raw Material
Q
w Production
Q
m
Manufacturer
Inspection
Section
Type I: Perfect
Quality
k
1
delivery
Retailer
Retailer 1
Type II: Imperfect Quality
item which are
sold at reduced
price u of
defective item
Type III: (1u)% of
defective item
are the case of
last sale
k
2
Delivery
Retailer 2
Retailer
Figure 2(a): Raw Material Inventory Level
T
1
0
I
n
v
e
n
t
o
r
y

L
e
v
e
l
Time
Manufacturers Raw Materials Inventory System
The raw materials inventory system at any time t can be represented by following
differential equation:
1
( )
( ), 0
w h
w
d I t
P g ht I t t T
dt

= s s
(1)
Using boundary condition I
w
(T
1
) = 0, the solution of the above equation is
1
( ) , 0
h
T
g t h
w
t
I t pe g u du t T
= s s
}
...(2)
at (0)
w w
I Q =
1 1 1
1
1
0 0 0
( )
( ) ( )
! 1
h
T T
h h m
g u
w
m
gT g u
Q P e d u P d u P T
m h
+
=
= = ~ +
+
} }
...(3)
Present Worth Ordering Cost
There is an initial replenishment ordering cost at the start of the cycle,
OR
w
= C
1w
(4)
Present Worth Inventory Holding Cost
Inventory is carried during the T
1
time period, so, holding cost is:
{ } { }
1 1 1
2 2
0 0 0
( )
( )
!
h h
T T T
m
r t g t g u
W W w w
m t
r t
HD C I t e d t C Pe e d u d t
m
= =
} } }
{ }
2 3 2
1 1 1
2
2 6 ( 1)( 2)
h
w
T r T g hT
C P
h h
+
~ +
+ +
(5)
Figure 2(b): Manufacturers Inventory Level
I
n
v
e
n
t
o
r
y

L
e
v
e
l
Time
0 T
1
T
2
T
2
65
Present Worth Item Cost Is
1
1
1
( )
1
h
w w w w
g T
I T C Q C P T
h
+
= ~ +
+
(6)
Present Worth Total Cost During the Cycle is
w w w
w
OR HD I T
TUC
T
+ +
=
(7)
Manufacturers Inventory System
Differential equation of the following model is
1
1
1
1 1
, 0 ,
m
t B
m
dI
Pe d t I t T
dt

o|

= s s
with
1
(0) 0
m
I =
(8)
1
1
1
1 1 2
( ),
m
B
m
dI
d t I t T t T
dt
o|

= s s
with
1
( ) 0
m
I T =
(9)
2
2
1 2
1
(1 ) ( ), 0 , 0 1
1
n
m
t
m
dI
d
P e t I t t T
dt
|
o
u o| u
o

= s s < s
with I
m
2
= 0 (10)
and
2
2
1 '
2 1 2
( ),
1
n
m
B
m
dI
d t I t T t T
dt
o
o|
o

= s s
, with
'
2
( ) 0
m
I T = (11)
Solutions of the above equations are
{ }
{ }
1
1 2 1
1
2 1 1
1
1 1
( ) ( )
1 2 1
( )
( ) ( )
1 2 1
t t
m
t t
t t t
Pe t d e t
I t
T T t
Pe T d e t
| |
| |
| |
o o
| |
o o
o o
| |
o o
| |
+ +

+ +

+ +
+ +
+ +
+ +
(12)
and
{ }
{ }
2
2 1
2
2 1
1 2
( )
2 1 1
( )
( )
2 1 1
n t
t
m
t n
t
d P t e t
e t
I t
P T e d t
e t
|
|
|
|
o |
o
o |
o
o u o
o |
u o o
o |
+
(13)
Now
1
2
( ) 0
m
I T =
1
1 2
1 2
( )
1
d T
T T
P
|
o
|
+
~ +
+
(14)
and
2
2
( ' ) 0
m
I T =
| |
1
2 2 2
1 2 2
' 1
2
2 2
(1 )
(1 ) 1
2 2
n n
T
d r T
Pr T
T
d d P
|
o
u o
o u |
o o
+
+
+
= =
(15)
Present Worth Set Up Cost
The start of the cycle has an initial production set up cost
1m
C , the present worth set up
cost is
1m
S C c = (16)
Present Worth Holding Cost
Inventory is carried during (0, T) time period. The present worth holding cost is
| |
`
1 1 2 2
1 1 2 2
1 1
2
0 0
( ) ( ) ( ) ( )
T T T T
r t r t r t r t
m m m m m m
T T
HD C I t e d t I t e dt I t e d t I t e dt

= + + +
} } } }
|
2 3 3 1 1 2
1 1 1 1 2 1 2 1
2 1 2
(
2 6 3 ( 1)( 2) ( 1) 2
m
T rT T T T T T T
C P T T
| |
o| o
| | |
+ +
~ + + + + +
+ + +
1 2 3 ' 2 2 1 2 3
1 2 1 1 1 2 1 2 2 2 3
1
)
) (
( 1) 2 3 2 2 1 2 2
T T r T T T T T T T T r T
d
| | |
o u u o o
| | |
+ + +
+ +
+ + +
|
' 2 ' 1 ' 2 ' 3
2 2 2 21 2
( )
1 2 1 2 3
n
d T T T r T
| |
o o o
o | |
+ +
+
+ +
(17)
Present Worth Production Cost
Production occurs during (0, T
1
) time period, so the present worth of production cost is
1
0
( )
T
r t
PC P Pe dt q

=
}
| |
1
1
( )
r T
P e
P
r
q

= (18)
67
Present Worth Total Inspection Cost Is
1
0
T
r t
c
I C I P e dt
=
}
| |
1
1
r T
c
e
I P
r
= (19)
Therefore, present worth total average cost of the production cycle is
m
m
I C HD SE PC
TUC
T
+ + +
=
(20)
Case I: Retailers Perfect Item Inventory System
The retailers inventory level of perfect items is illustrated in Figure 2(c). The initial
delivery is at time t = 0 in the inventory system. The inventory level reduces due to
combined effect of demand and deterioration and reaches zero level during time period
2
1
T
k
.
There are k
1
deliveries in T = T
1
+ T
2
time period. The differential equation of the
following system is given as:
1 1 2
1
1
( )
, 0
r
dI t
T
d t t
dt k
|
o|

= s s
, with
1
2
1
( ) 0
r
T
I
k
=
(21)
Solution of the above equation is
| |
1
1
2
1
2 1
1
1
( )
( )
1 1
t
r
T
T k t
I t e d t
k
|
|
|
o
o
o
| |
+
+
= +
+ +
(22)
Figure 2(c): Inventory Level of Perfect Item
0
Time
2
1
T
k
I
n
v
e
n
t
o
r
y

L
e
v
e
l
at
1 1
0, (0)
r r
t I MI = =
| |
1
1 2
2 1
1
1
( )
1
r
T
T k
MI d
k
|
o
|
+
= +
+
(23)
Quantity per delivery to the retailer is
1 1
r r
Q MI =
(24)
The delivery has an initial ordering cost
1
1r
C
at the start of the delivery. The present worth
ordering cost is
1
1 1r
OR C =
(25)
Present Worth Holding Cost
Inventory is carried during
1
T
k
time period. The present worth holding cost is
2
1
1 1 1
2
0
( )
T
k
rt
r r r
HD C e I t dt
=
}
| |
1
2 2 2 2 3 2
1 1 1
2 1
( ) ( ) ( )
2 6 ( 1)( 2)
r
T T T
r
k k k
C d
|
o |
| |
+
= +
+ +
(26)
The Present Worth Total Cost per Delivery
1
1
1
'
2
r
r
OR HD
TUC
T
+
=
(27)
There are k
1
deliveries per cycle. The fixed time interval between deliveries is
1
1
T
k
.
Therefore, present worth total cost per cycle is
1 2
2 1
1 1 1
2 1
' '
0
1
( )
1
k r T
i r T k
r r r
r T k
i
e
TUC TUC e TUC
e
= =
(28)
Case II: Retailers Imperfect Item Inventory System
The retailers inventory level of imperfect items is illustrated in Figure 2(d). Inventory
level
2
( )
r
I t
decreases due to the combined effect of demand and deterioration. There are
69
k
2
deliveries of imperfect items in T = T
1
+T
2
'
time period. The differential equation of the
following system is given as:
2
'
1 2 2
2
2
( )
( ) , 0
1
n
r
dI t
d T
t I t t
dt k
|
o
o|
o

= s s
(29)
with boundary condition
'
2
2 2
( ) 0
T
k r
I =
Solution of the above equation is
| |
2
'
1 2
' 1
2 2 2
2
( )
( )
1 1 1
n
t
r
T
d T k t
I t e t
k
|
|
|
o
o
o o
o | |
+
+
= +
+ +
(30)
at
2 2
0, (0)
r r
t I MI = =
| |
'
2
2
2
1 '
2 2
2
( )
1 1
T n
k
r
d T
MI
k
|
o o
o |
+
= +
+
(31)
Quantity per delivery to the retailer is:
2 2
r r
Q MI =
(32)
Initial ordering cost of the delivery is at the start of the delivery.
The present worth ordering cost is
2
2 1r
OR C =
(33)
Figure 2(d): Inventory Level of Imperfect Items
Time
0 2
2
T
k
'
I
n
v
e
n
t
o
r
y

L
e
v
e
l
Present Worth Holding Cost Is
Inventory carried up during time period
'
2
2
[0, ]
T
k
'
2
2
2 2 2
2
0
( )
T
k
r t
r r r
HD C e I t dt
=
}
| |
' '
2 2
2 2
2
'
2 2
2 3
2 2
2
( )
( ) ( )
1 2 6 ( 1)( 2)
T T n
k k
n
T
r d k
C
|
o|
o
o | |
+
~ +
+ +
(34)
Present Worth Total Cost per Delivery Is
2
2
2
'
2
r
r
OR HD
TUC
T
+
=
'
(35)
There are k
2
deliveries per cycle. Therefore, the present worth of total cost per cycle at
t = 0 is:
'
2 2
'
2
'
2 2 2 2
2
' '
0
1
( )
1
T
k
k r T
i r T
r r r
r
i
e
TUC TUC e TUC
e
= =
(36)
Present worth total cost per unit time of the manufacturer and the retailer is the sum
of
1 2
, , and
W m r r
TUC TUC TUC TUC
1 2
1 2 2
min ( , , , )
w m r r
TUC k k T P TUC TUC TUC TUC = + + + (37)
s.t.,
2
0 , T s
2 1
T T > (38)
Solution Producer
The optimization technique is used to minimize Equation (37) to derive P and T
2
as
follows:
Step 1: Start by selecting the values of
1
1 k > and
2
1 k > , where k
1
and k
2
are the number
of deliveries.
Step 2: Take the partial derivative of
1 2 2
( , , , ) TUC k k T P with respect to P and T
2
and
equate them to zero. The necessary conditions for optimality are:
71
1 2 2
( , , , ) TUC k k P T
P
c
c
= 0 and
1 2 2
2
( , , , ) TUC k k P T
T
c
c
= 0
These equations can be solved for P and T
2.
Step 3: The values found at Step 2, substitute into Equation (37) and derive
1 2 2
( , , , ) TUC k k T P
Step 4: Repeat Steps 2 and 3 for all possible values of
1 2
, k k until the
minimum
1 1 2
( , , , ) TUC k k T P
- - - -
is found. The
1 1 2
( , , , ) TUC k k T P
- - - -
values constitute the
optimal solutions that satisfy the following conditions:
1 2 2 1 2 1 2
( 1, 1, ( 1, 1), ( 1, 1)) TUC k k T k k P k k
- - - - - - -
>
1 2 2
( , , , ) T U C k k T P
- - - -
and
1 2 2
( , , , ) TUC k k T P
- - - -
s
1 2 2 1 2 1 2
( 1, 1, ( 1, 1), ( 1, 1)) TUC k k T k k P k k
- - - - - - -
+ + + + + + .
In the above equations,
1 1 2 1 2
( 1, 1), ( 1, 1) T k k P k k
- - - - -
is optimal for T
2
and
P respectively when number of deliveries are
1 2
( 1, 1) k k
- -

Step 5: Derive the
1 2 1 2
'
1 2
, , , , , , , , , , ,
w m r r r w m r r
T T T Q Q Q Q Q TUC TUC TUC TUC
- - - - - - - - - - - -
Numerical Illustration
For various values of the parameter listed below, the numerically derived solutions are
presented in Tables 1 and 2, and the sensitivity analysis in Table 3.
T = 0.04, u = 0.9, o = 0.06, | = 4, o = 50, g = 0.05, h = 2, r = 0.8, n = 0.6,
R = 150, G = 2500, H = 0.001, P = 600, C
1
= 100, C
2
= 3, C
3
= 8, C
4
= 90, C
5
= 2,
C
6
= 80, C
7
= 5, C
8
= 70, C
9
= 8, d
1
= 300, d
2
= 180.
1 2.3281 130,187
2 2.3201 127,484
3 2.3197 127,117
4 2.3195 126,972
5 2.3194 126,900
6 2.3193 126,859
7 2.31929 126,833
8 2.31927 126,816
9 2.31925 126,805
10 2.31924 126,796
Table 1: Numerical Solutions Derived
for k
2
= 1
k
1
T
2
TUC
Table 2: Numerical Solutions Derived
for k
1
= 1
1 2.3281 130,187
2 2.61893 160,760
3 2.6286 171,599
4 2.62971 171,891
5 2.63000 171,994
6 2.63013 172,045
7 2.6302 172,074
8 2.63024 172,093
9 2.63027 172,106
10 2.63029 172,115
k
2
T
2
TUC
Table 3: Sensitivity Analysis
Percentage T
2
TC
of Change (%)
u 50 3.2878 321,903
25 2.5293 155,715
+25 2.1466 111,388
+50 1.7424 798,76.5
T 50 2.3282 130,209
25 2.3281 130,193
+25 2.32807 130,182
+50 2.328 130,160
I
C
50 2.3279 130,093
25 2.3280 130,140
+25 2.32819 130,235
+50 2.32824 130,282
R 50 2.1847 63,136.4
25 2.2677 95,641.3
+25 2.3755 166,389
+50 2.4145 203,992
H 50 2.32767 129,904
25 2.32788 130,046
+25 2.32831 130,321
+50 2.3285 130,471
C
1
50 2.3251 128,222
25 2.3266 129,204
+25 2.3296 131,172
+50 2.3310 132,158
73
Conclusion
In this study, we consider that for the deteriorating items, values and utility of goods
decreasing over time implies smaller cycle length, whereas inflation in cost implies larger
cycle length. In this study, inventory models have been developed considering imperfect
production processes with volume flexibility. We consider two retailers, the demand of first
retailer is for perfect quality items and the demand of second is for imperfect quality items
with reduced selling price. Numerical solutions are derived for finding optimal system
costs for the two categories of retailers. From the analysis, we can say that as number
of deliveries increases, total cost also increases.
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75
Nomenclature
P Production rate, a decision variable.
d
1
Demand rate of perfect quality products.
d
2
Deterministic factor of the demand of defective items.
n Fixed positive integer.
I
m
1
(t) On hand inventory of perfect quality products at time
0 > t
.
I
m
2
(t) On hand inventory of imperfect quality products at time
0 > t
.
q(P) Unit production cost.
R Material cost per unit item.
G Total/labor cost for manufacturing items.
H Tool/die cost per unit item.
I
c
Inspection cost per unit item.
o Reduction (in %) of selling price for imperfect quality products.
S Selling price for imperfect quality products.
u Percentage of imperfect quality items suitable for sale in market, the
remaining (1 u) times of defective item (unsold items) being totally
rejected.
r Inflation rate.
g Scale parameter of deterioration rate of raw material.
h Shape parameter of deterioration rate of raw material.
o Scale parameter of deterioration rate of finished goods.
| Shape parameter of deterioration rate of finished goods.
Q
w
Raw materials order quantity per order.
Q
m
Manufacturers finished goods production quantity per production.
Q
r
Retailers received quantity per delivery from the manufacturer.
k
1
Number of deliveries per order for perfect item for retailer 1.
k
2
Number of deliveries per order for perfect item for retailer 2.
T
'
1
The production period.
T
2
Cycle length of imperfect quality item.
Appendix
Appendix (Cont.)
T'
2
The non-production period.
T Length of the cycle, T = T
1
+ T
2.
I
w
(t) Raw materials inventory level at any time , 0 . t t T s s
I
m
(t) Manufacturers finished goods inventory level at anytime , 0 t t T s s
I
r
(t) Retailers finished goods inventory level at any time , 0 t t T s s
C
1w
Manufacturers ordering cost per order cycle ($/cycle).
C
1m
Manufacturers set up cost per production cycle ($/cycle).
C
1r
1
Retailers ordering cost per order cycle for finished goods.
C
1r
2
Retailers ordering cost per order cycle for imperfect goods.
C
2w
Raw materials holding cost per unit time.
C
2m
Manufacturers holding cost per unit time.
C
2r
1
Retailers holding cost for finished goods.
C
2r
2
Retailers holding cost for imperfect goods.
C
r
1
Retailers finished goods per unit cost.
C
w
Raw materials per unit cost.
C
r
2
Retailers imperfect goods per unit cost.
MI
m
Manufacturers inventory level.
MI
r
1
Retailers inventory level of finished goods.
MI
r
2
Retailers inventory level of imperfect goods.
TUC
w
Raw materials total cost per unit time.
TUC
m
Manufacturers total cost per unit time.
TUC
r
1
Retailers total cost for finished goods per unit time.
TUC
r
2
Retailers total cost for imperfect goods per unit time.
TUC Total cost per unit time.
Reference # 34J-2010-03/06-05-01
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