EUROPEAN JOURNAL OF OPERATIONAL RESEARCH

ELSEVIER European Journal of Operational Research 87 (1995) 685-692

Multi-item inventory control: A multicriteria view

J . D . L e n a r d * , B. R o y
LAMSADE, University Paris-Dauphine, PI. du Mar~chal de Lattre de Tassigny, 75775 Paris cedex 16, France

Received November 1994; revised April 1995

Abstract

The difficulties encountered in the practice of inventory control led us to several criticisms of the classical inventory models. We define another approach for the determination of inventory policies based on the notion of efficient policy surfaces. We extend this notion to multi-item inventory control by defining the concepts of family and aggregate item. Using several attributes, we build families of items. In every family, an aggregate item is built in order for the inventory practitioner to make decisions.
Keywords: Inventory;Efficient policies; Multi-criteria analysis

1. Introduction

The control of inventories has for a long time been a very classical OR problem. Since 1913 with Harris [4], a large number of OR researchers have studied this subject. From the available literature, it seems that inventory problems have received less attention in the recent past. However, general difficulties experienced by finns and budget restrictions seem to have aroused new interest in this field of research. This paper presents an original approach to inventory problems which differs from the classical one inasmuch as it does not make explicit use of costs and does not propose analytical solutions. Our study is being conducted in collaboration with a large public transport company in France. This company holds more than a hundred thousand different items in stock; some are in a single echelon storage structure, others in a two echelon structure. Considering the various difficulties encountered in the control * Corresponding author. E-mail lenard@lamsade.dauphine.fr.

of its inventories, this company wished to rethink its inventory policies. This allowed us to study in depth the everyday practice of inventory control, the inventory policies applied and the computerized inventory model in use. Our conclusions are naturally very much linked to the particular case of this company. However, it is our belief that the proposed approach is a more general one and may be used with benefit in other circumstances. From our study of the existing inventory practice in the company, it was clear that theory and practice are to a large extent disconnected in inventory management and this led us to four main criticisms regarding the inventory models and their use. These are explained in Section 2. Given these criticisms, we developed another approach to decision-aid in inventory control which is, in our view, more adapted to the practice of inventory. This paper presents an approach to multi-item inventory control which avoids cost problems and strong hypotheses definitions while providing the

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decision-maker with ways to use his knowledge and experience in the determination of inventory policies. This multi-item model uses a multicriteria mono-item model based on the notion of efficient policies. This model is presented in Section 3. However, we believe that mono-item inventory models are not satisfactory for inventory practice and that multi-item models are necessary. This is discussed and reasons are given in Section 4. Then, using a structure of both theoretical and practical attributes, items are grouped into families. For each family, an aggregate item is chosen or built. With this aggregate item, efficient policy surfaces are drawn in order for the practitioner to make decisions. This multi-item decision process and the multi-item inventory control model are detailed in Section 5.

2. A gap between theory and practice

An extremely large number of models have been developed to solve inventory problems. Each model uses a particular set of hypotheses: demand for the item may be deterministic, non-deterministic or unknown; lead-times may be constant or probabilistic; storage structures may be on one or n echelons; shortage costs may be considered or not; there may be constraints on the model or not, one or n suppliers and so o n . . . "There is practically no end to the number of different properties that systems (inventory) can have"[5] Whatever the hypotheses may be, the large majority of models follow the same kind of approach. A cost function is defined as an aggregate of the three main dimensions of the inventory problem. This function is generally the sum of stockholding costs, ordering costs and shortage costs. These costs evolve in opposite directions: for instance, an increase in the reorder period leads to a decrease in order costs but to an increase in stockholding costs. The purpose of inventory models is, in this respect, to minimize the aggregated cost. As shortage costs may be difficult to evaluate, security stocks are often defined so that the probability that shortages occur should not exceed a given threshold. This basic model has been very much enlarged upon: the demand function may be linked to the item price, other shapes of the cost function have been studied (quadratic, non-linear or non-convex), Bayesian tech-

niques may tackle unknown demand functions, etc. (see Porteus [6] for a clear and complete overview of these models). The minimum cost is interpreted as the optimal solution to the inventory problem, that is, the best compromise with respect to all three dimensions. There is no doubt that these researches led to great advances in inventory control, the number of applications of such models is, in itself, proof of their usefulness. However, from our experience of the company we are collaborating with, there exist a number of difficulties linked to these models which lead to problems in their implementation and use. It is clear that these criticisms of inventory models are not intended to be general ones. However, it is our belief that they are applicable in many real situations. This is, in particular, confirmed by Ziegler's study [ 11 ]. Firstly, it is generally assumed in the theory that marginal ordering, holding and shortage costs can be defined. However, in practice, it is difficult, if not impossible, to attribute a value to such costs. Moreover, it is generally virtually impossible to justify the values given to the cost parameters and thus only simple estimates are used (see Ziegler [ 11 ] for a good study of this question): holding cost is often defined as a percentage of the price of the item; moreover, in the company we are working with, ordering costs have not been modified for years whilst shortage costs are not even used. There is clearly no proof that such costs are appropriate to defining inventory policies. For instance, using a percentage of the price of the item as stockholding cost does not take account of the real cost of holding an item, which should be linked to the difficulty of keeping this particular item. This type of average cost, although it may be useful for financial purposes, does not correspond to any reality in terms of inventory. Therefore, the optimal solution for models using such costs is a purely theoretical optimum. Secondly, due to the analytical procedures employed in the determination of the optimal solution, it is often necessary to make simplifying hypotheses that weaken the realism of the model. For instance, it is relatively complicated to take into account multi-echelon storage structure and non-deterministic lead-times (see Axsater [ 2] for a good idea of the complexity of such models) whereas these features are frequently encountered in everyday practice. Therefore, the required models may be too complex to be understood

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by practitioners. They might only be black boxes that most users may blindly believe in or often reject. Thirdly, since most models provide the practitioner with the optimal solution, there should be no need for further investigation. However, there is, in practice, a large amount of information the practitioner has but that has not been integrated into the model, such as possible changes in the demand pattern, knowledge of the suppliers' habits, importance of particular items in terms of strategy or image, etc., in short, his experience and "intimate knowledge of the particular circumstances of the company" [9]. Given a single solution, the practitioner has no opportunity to integrate this information in order to modulate the solution proposed and make his decision. Fourthly, in the authors' opinion, there is a confusion between action variables and monitoring variables in inventory control. We call monitoring variables the parameters on which objectives are defined in the company, on which decisions are based and action variables the paraineters used to reach the pre-set objectives, to apply the decisions. Typically, the decisions taken in inventory models are a period and a replenishment level or a threshold and an order quantity. We think that these variables are only action variables. What is at stake in inventory control is the inventory level, customer service and workload and it is on the basis of these three notions that objectives should be defined and decisions taken. Periods and replenishment levels are, in that respect, two technical parameters used to reach the objectives, they are action variables. These four reasons led us to define another approach to inventory control in an attempt to provide a response to these difficulties.

3. The mono-item inventory control model The idea of efficient policy curves seems to have been first used by Starr [9] but only in the deterministic case. He showed that the product of average stock level by number of orders does not depend on the cost parameters and that it is possible to determine an efficient policy curve showing the tradeoffs between stock levels and number of orders. Alscher [ 1 ] used the same kind of idea and defined a general procedure. Gardner [3] used this approach in the non-

deterministic and multi-item case. He extended the notion of efficient policy curve to that of efficient policy surfaces by integrating shortages as a third criterion. He developed his approach to solve the inventory case with restrictions on available space, maximum number of shortages and stock levels. However, it is our belief that his approach has important limitations: The functions he analyticaly defined cannot take into account multi-echelon structures and/or nondeterministic lead-times. Moreover, only order up to policies seems to have been studied. Finally, Gardner defined indicators such as the expected annual number of requisitions short or the workload globally for the whole warehouse regardless of the specificities of items. In particular, the notion of aggregate service level is generally treated as the arithmetic mean of the individual service levels. It is clear that, in practice, such an approach cannot be used as it might lead to unacceptable shortage levels for a number of items. We also believe that the notion of policy curves or surfaces may be applied with benefit in unrestricted cases. For these reasons, we may say that we are in the same basic line of research (working with unknown costs and using efficient policy surfaces) but that we develop a completely different approach. In our view, the multiitem non-deterministic case deserves further investigation. According to the previous elements and some others, it seems to us that the analytic approach is not able to take into account important features of policies. Moreover, this approach does not seem able to convince practitioners, that is why, after a short study, we decided to use simulation for inventory policies. The mono-item inventory control model was initially developed by Sutour [10] and Roy [7]. It is based on three criteria: average stock level, number of shortages per year and period (as representative of the workload). The user may define a number of parameters. They consist in a type of inventory control policy (periodic review or order up to policy), lower and upper bounds of reasonable periods of replenishment (exact periods in case of periodic review or average ones for order up to policies) and lower and upper bounds for shortage levels. From our experience, practitioners have no difficulty in evaluating these bounds as they daily work with these kind of values to analyze inventory policies. These values may, of course, be easily changed. Then, the behaviour of the inventory system is simulated according to the given values.

688 Average stock level 40 35 30 25 20 15 10

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period 1 _ _ period 2

3 4 5 6 7 Number of shortages per year Fig. 1. The efficient policy curves

10

Series of simulations are used to approximate efficient policy surfaces for the inventory system. Efficient policy curves, belonging to the efficient policy curves and corresponding to the lower, upper and average periods defined by the practitioner, are presented as shown in Fig. 1. The determination of these curves is not a simple process. Briefly, in case of a single echelon inventory system, one has only two action variables, the period and the replenishment level or the reorder point and the quantity. Hence, the image of this two-dimensional variety in the three criteria space is a surface. It appears that all policies are efficient (there may be exceptions at the limits of the given intervals with sometimes vertical frontiers for the surface but these cases are quite obvious to eliminate). In the other cases, that is with multi-echelon systems and/or if deliveries may be partial, we have at least three action variables and the exact determination of the efficient policy surface is quite complicated. A very large number of simulations showed us that there are some regularities for the lower part of the envelope surrounding the points corresponding to the policies in the three criteria space. From these regularities and using adjustment methods, we were able to define good approximations of the efficient policy surface. There is, of course, not enough space and it is not the main purpose of this paper to detail this process. Simply, it can simulate any single or multi-echelon inventory system policy, with non-deterministic lead-times and partial or complete delivery, and determine a good approximation of the efficient policy surface. From these curves and using his knowledge of the

item, the practitioner is able to quickly determine the point or the area on the curves which he thinks most satisfactory for the item. Classical replenishment parameters (quantity and time for orders) may be calculated from the chosen point. In our view, and from the reactions of the practitioners, this approach is well adapted to the practice of inventory control as it allows the tradeoffs to be visualized among the three criteria. Moreover, since no "optimal policy", but a set of efficient policies is presented, the decision-maker is able to take into account all the particular characteristics of the item that are not or cannot be integrated into the model such as information regarding a future change in the demand pattern or the behaviour of the supplier, etc. An experiment on several items using this approach showed that substantial stock reductions could be achieved without affecting service levels and/or increasing workload. It is our belief that such a multicriteria system may be successful by improving understanding of the relationships between criteria and thus improving definition of policies. It also proved to be a good educational tool as, for new practitioners, it facilitates understanding of inventory functioning through comparison of different policies. Finally, we believe that it may be an interesting way to communicate with other services or people interested in inventory control, such as financial services or users of the items, whose interests are opposed (financial services clearly wish to maintain stock levels as low as possible regardless of service levels whereas the users of the items have the opposite point of view).

4. The need for multi-item inventory models

Most models and software developed or published concentrate on mono-item inventory control. However, practitioners are responsible for the management of thousands of items and mono-item models do not help them in this activity. We believe that a multi-item model is often necessary, especially when the number of items is very large, for four main reasons. Firstly, inventory management, like nearly any managerial area, is based on the determination and achievement of objectives. In inventory control there may be a large number of objectives, the most important ones generally concerning the overall service level and the

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average quantity of items held in stock. These objectives are naturally not determined at the item level but at a higher level where a large number of items are concerned. We believe that mono-item models are not appropriate to this type of management. As in the cases with restrictions, the practitioner has no allencompassing information to set his objectives, no data in order to assess their feasibility and no way to evaluate his current position. Moreover, no strategy can be determined to attain preset objectives. It is only with a multi-item inventory model able to give a overview of the system that objectives may be set and that policies may be determined with respect to the objectives. Moreover, a lot of time and work (and therefore cost) may be saved by coordinating policies for the different items. Although there are, of course, important items which must be studied individually, large majority of items may be dealt with in groups. This may tend to lower the quality of the policies defined (in terms of the classical objective function). However, it is our belief that the time saved on the unimportant items may be used with benefit for the important ones. Such an approach can only be applied through a multi-item model. Secondly, we think that optimal solutions should no longer be automatically provided. In our view, such a global optimal solution might not exist and, if it does, it is often not computable. There are far too many particular circumstances, item specificities and unforecasted events that models cannot take into account. The system should be a way to facilitate and enrich the practitioner's activity but the decision should remain entirely his. In that respect, the time required by the practitioner to analyse the system's proposals (efficient curves or others) and to make his decision is no longer compatible with the number of items that he is responsible for. Furthermore, even with "automatic" models, as soon as some kind of analysis of the policies proposed is required, mono-item models are no longer sufficient. Thirdly, as widely recognised in the literature on the subject, there are constraints affecting several items simultaneously. For instance, space restrictions or financial considerations may become constraints which link all the items, and the policies of any item must take the constraints into account. It is clear that, in such cases, multi-item models are necessary. It is only with an overview of the inventory system (and in par-

ticular of the constraints) that such restrictions may be tackled. Fourthly, there may be what we call functional groups. A functional group is a set of items used for the same activity. For instance, periodic maintenance of a bus requires systematic replacement of a few items. If one of the items is missing, the entire maintenance work cannot be performed. It has been observed that, in the company we are collaborating with, such problems frequently occur. Mono-item models cannot provide a solution to this difficulty. On the contrary, as in the cases with restrictions, only a multi-item approach can coordinate the policies for a set of items. These items should, in our view, be grouped together so that the policies applied for every item may be determined taking into account the fact that the item belongs to a functional group. For these four main reasons, it is our opinion that multi-item models are necessary for a proper management of inventories. The multi-item approach we are developing attempts to provide responses to these difficulties.

5. The multi-item inventory control model

As previously mentioned, we believe that not all items should be treated in the same way. In order for the practitioner to have an overview of his inventory system, we decided to build families of items. A family is, in this study, a set for items on which the decision will be the same (in terms of values for the two criteria: number of shortages per year and period of replenishment). It is clear that such families must be carefully designed. In this respect, we defined a structure of attributes to assess the feasibility of grouping items. We identified three differents levels of attributes: there are attributes on which differences between items prevent the grouping of these items; there are attributes on which differences between items weaken the grouping; finally, there are attributes which are particularly useful for the inventory manager. The attributes preventing grouping are the storage structure and the strategic importance of the items. Items with different storage structures cannot be grouped together as the role of the warehouses is different at each echelon (dispatching to other warehouses or delivering

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to the consumers). Strategic and non-strategic items also cannot be grouped as the decision would be different. Strategic here refers to two different notions: there may be items which are strategic because shortages lead to difficulties in activities and items that are strategic because they are particularly expensive. This particular feature of items modifies greatly decisions: items which are strategic from the activity (respectively cost) point of view will be allowed a lower number of shortages per year (respectively stock level) than non-strategic ones. There are also two attributes on which differences weaken the grouping. A weak family means that, given a particular decision for the family, the consequences for the criterion 'average stock level' for the different items of the family may be very different. These two attributes are the demand dispersion and the leadtime of the items. Given a decision, it is clear that the average stock level will be higher for an item with a higher standard deviation of demand (the same holds for the lead-time). There are also three attributes useful to the practitioner. These are the nature of the items, the supplier and the existence of functional groups. Using the first five attributes, families of items are built. Naturally, these families are built in collaboration with the user as he is the only person able to assess the actual feasibility of a particular grouping. A first set of families is presented along with measures of the quality of these families.' Building these families is a complex process and several techniques may be used. In order to avoid serious interpretation problems, we have decided to predefine the first set of categories. This set has been determined empirically from what we have found reasonable and from the results of simulations on items. It covers all the spectrum of the possible combinations of values for the attributes. Each category is defined as a set of intervals, one for each attribute. We call profile of a category this set of intervals. As these categories are predefined, they may not be perfectly adapted to the grouping of the actual items. However, it should not be a serious drawback as categories may be easily modified and as this set is designed to be a first indication of what a possible grouping may be and not a final solution. The problem is therefore to assign items to these categories. Our approach is founded on four main principles: Firstly, there shonld be no compensation among at-

tributes, that is when assessing the compatibility between a profile and an item, a large difference on a particular attribute (unfavourable case for the assignment) should not be compensated by a small difference on another one (favourable case) to result in some average compatibility level. Secondly, values for items on attributes are not precisely known. They may have been given by the user (strategic importance for instance) or evaluated on the past (consumption level) to the used as an estimate of the behaviour of the item in the future. Thirdly, evaluating the compatibility means to measure to what extent the values of the item correspond to the ones of the profile or not. It seems to us that using some {0; 1 } membership functions if the values of the item corresponds or not to the profile does not reflect the natural graduality existing in our case (a value close to a border of the interval should not be considered as unfavourable as a value extremely far from it). Hence, we define a [ 0, 1 ] membership function more adapted to our case. Fourthly, we use the notions of concordance and discordance to assess the compatibility. The concordance measures to what extent the values of the items are in favour of the assignment and the discordance to what extent the values are unfavourable to the assignment (see Roy [8] for more details on these concepts). Using these principles, we are experimenting the aggregation procedure to implement in order to define compatibility levels for each item and for each category. In that respect, items are assigned to the category for which the compatibility level is the highest. This fuzzy assignment gives us great flexibility in the assignment. If, for any reason, the practitioner wishes to move an item from a family to another one, we are able to propose the second, third . . . best category. Conversely, if the practitioner wishes to assign an item to a particular family, we can give him some indications on the compatibility of this particular assignment. This aspect is still under study but we believe it is extremely helpful to define families adapted to the particular needs of the practitioner and, in particular, it allows us to take into account in a following procedure the questions of the nature of the items, of the suppliers and of the functional groups. Finally, in order for the practitioner to assess the quality of the families built, a set of measures is presented. The measures reflect the weakness or strengh of a particular group. Let us recall that the larger

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the differences regarding the criterion "average stock level" for the same decision on two items, the weaker the quality of the grouping of these two items. The maximum expected difference between any two items in a family on the criteria "average stock level" is presented as a measure of the quality of the family. This measure depends on the period and the shortages chosen. As they are not yet decided, a set of values using short and long periods, low and high number of shortages, is presented. Given these measures for each family, the user may move items from one family to another, so that the qualities of the groups become satisfactory with respect to the measures and also to any particular requirements the user may have. Once families are set, a single decision is to be taken for each of them. The user has to decide what number of shortages and period he believes most appropriate for each family. To help the decision-maker in this process, we use the mono-article model already defined. We build an aggregate item to represent a family. This fictitious item should, in its parameters be a synthesis of the main characteristics of the items of the family. Its two main parameters are the demand and the lead-time. To define the aggregate demand, we transform the individual demand so that they all have the same mean (it can be proved that this does not affect the efficient policy curves as it can be considered as a simple change of units). Then, the aggregate demand is built as a mixture of the individual ones. Using this procedure, the aggregate demand has the same mean as the individual ones and the variance of the aggregate demand is the arithmetic mean of the individual ones. It can be shown that, for a family of p items (AI . . . . . Ap) whose demands Oi, i E {1 . . . . . p}, have the same mean/.t and standard deviation o'i, the combination of the demands has mean/z and standard deviation

here and compared to other approaches during experimental tests. It proved to be the most sensible way to build the demand of the aggregate item. As for the lead-time, for the time being, only deterministic lead-times have been considered and a simple mean of the individual lead-times has been shown to be satisfactory. When the aggregate item is built, the efficient policy curves, determined with the mono-item model described in Section 3, for the aggregate item are presented and the practitioner may take his decision (number of shortages per year and period). Then, the decision is applied to every item of the family to calculate its individual replenishment variables (what we called action variables in Section 2). At the end of this process, the practitioner can visualize the expected average stock levels for any item and modulate decisions individually, if required.

6. Conclusions

I P
i=l

providing the samples have same length (it may be easily computed with samples having different lengths). Thus, the efficient policy curves for the aggregate item are as close as possible to any individual ones. This procedure has been defined according to theoretical considerations that cannot be explained

A study of the inventory control system of a large company was carried out. It led to the conclusion that a large gap exists between theory and practice in inventory management. We made several criticisms which, in our view, are the main reasons for this gap. We proposed an attempt to close this gap using a multicriteria approach. Furthermore, we showed that multi-item inventory control models are often necessary for the practice of inventory management. We suggested that items may be grouped into coherent families using a structure of attributes which are both theoretical and practical. Then, we proposed building an aggregate item representative oftbe different items of the family in order for the practitioner to take his decisions on the basis of the multicriteria mono-item model. The multicriteria mono-item model was already used for several items and produced good results inasmuch as substantial stock reductions were achieved. As this is an on-going study, several aspects require more work: the indices for strengh and weakness of families have to be made more precise, the fuzzy assignment techniques must be tested and, in particular, the pre-defined categories have to be carefully designed. It is our belief that this kind of approach is more appropriate to the practice of inventory management as it provides the practitioner with elements

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[6] Porteus, E.L., "Stochastic inventory theory", in: D.E Heyman and M.J. Sobel (eds.), Handbooks in Operational Research and Management Science, Vol. 2, North-Holland, Amsterdam, 1990. [7] Roy, B., and Letellier, E, "'A multiple criteria approach to inventory control in a two level structure", Proceedings of the Conference on the Practice and Theory of Operations Management, AFCET, Paris, 1989. [8] Roy, B., Multicriteria Methodology Jor Decision Aiding, Kluwer Academic Publishers, Dordrecht, 1995 (to be published). [9] Starr, J.M., and Miller, D.W, Inventory Control: Theory and Practice, Prentice-Hall, Englewood Cliffs, NJ, 1966. [ 10] Sutour, M.C., A multicriteria approach to inventory control, Doctoral Dissertation, University Paris-Dauphine, Paris, France, 1993 (in French) [ 11 ] Ziegler, R.E., Criteria for measurement of the cost parameters of an economic order quantity inventory model, Doctoral Dissertation, University of North Carolina, 1973.

w h i c h m a k e a useful contribution to his decisionm a k i n g process.

References
[1] Alscher, J., and Schneider, H., "Resolving a multi-item inventory problem with unknown costs", Engineering Costs and Production Economics 6 (1982) 9-15. [2] Axs~iter, S., "Optimization of order-up-to-S policies in twoechelon inventory systems with periodic review", Naval Research Logistics 40 (1993) 245-253. [3] Gardner Jr, E.S., and Dannenbring, D.G., "Using optimal policy surfaces to analyze aggregate policy tradeoffs", Management Science 25/8 (1979) 709-720. [4] Harris, F.W., "How many parts to make at once", Factory, the Magazine of Management 10/2 (1913) 135-136, 152. [5l Naddor, E., "Evaluation of inventory control", Proceedingsof the Second International Congress of Operational Research, Dunod, Paris, 1961.