Computers & Industrial Engineering 61 (2011) 13181323

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Computers & Industrial Engineering

journal homepage: www.elsevier.com/locate/caie

Modeling and analysis of single item multi-period procurement lot-sizing

problem considering rejections and late deliveries
Devendra Choudhary a,, Ravi Shankar b
a
b

Department of Mechanical Engineering, Govt. Engineering College Ajmer, Badliya Circle, NH-08, Ajmer, Rajasthan 305 002, India
Department of Management Studies, Indian Institute of Technology Delhi, Hauz Khas, New Delhi 110 016, India

a r t i c l e

i n f o

Article history:
Received 16 March 2011
Received in revised form 4 August 2011
Accepted 5 August 2011
Available online 17 August 2011
Keywords:
Integer programming
Lot-sizing
Inventory management
Quantity discounts
Supply chain

a b s t r a c t
Integer linear programming approach has been used to solve a multi-period procurement lot-sizing problem for a single product that is procured from a single supplier considering rejections and late deliveries
under all-unit quantity discount environment. The intent of proposed model is two fold. First, we aim to
establish tradeoffs among cost objectives and determine appropriate lot-size and its timing to minimize
total cost over the decision horizon considering quantity discount, economies of scale in transactions and
inventory management. Second, the optimization model has been used to analyze the effect of variations
in problem parameters such as rejection rate, demand, storage capacity and inventory holding cost for a
multi-period procurement lot-sizing problem. This analysis helps the decision maker to gure out opportunities to signicantly reduce cost. An illustration is included to demonstrate the effectiveness of the
proposed model. The proposed approach provides exibility to decision maker in multi-period procurement lot-sizing decisions through tradeoff curves and sensitivity analysis.
2011 Elsevier Ltd. All rights reserved.

1. Introduction
Multi-period procurement lot-sizing decision seeks best tradeoffs among multiple cost objectives to determine appropriate lotsize and its timing to minimize total cost over the decision horizon.
The multiple cost objectives are purchasing cost, transaction
(ordering and transportation) cost, inventory holding cost and/or
shortage cost. Supplier offers discounts, which tend to encourage
buyer to procure larger quantities to obtain operating advantages
such as economies of scale and reducing the cost of ordering and
transportation. In such a scenario, product could be carried forward to a future period, incurring inventory holding cost. This
means that in each period either procurement takes place or buyer
has inventory carried forward from the preceding period. Smaller
lot-size procurement strategy reduces inventory holding cost but
increases purchasing cost and transaction cost. Procurement of larger lot-size reduces purchasing cost and transactions cost but leads
to higher inventory cost. Supply chain risks such as rejections and
late deliveries also affect the procurement lot-sizing decisions.
Therefore, decision maker considers tradeoffs among purchasing
cost, transaction cost, inventory holding cost and/or shortage cost
in multi-period procurement lot-sizing decisions to minimize total
cost over decision horizon.
Corresponding author. Mobile: +91 09413689065.
E-mail addresses: dceca@rediffmail.com (D. Choudhary), ravi1@dms.iitd.ernet.in
(R. Shankar).
0360-8352/$ - see front matter 2011 Elsevier Ltd. All rights reserved.
doi:10.1016/j.cie.2011.08.005

Material Requirement Planning (MRP) involves procurement

lot-sizing decisions to be made when demand is both stable as well
as lumpy and the approach is spread over a nite time horizon. In
the restricted case, when demand is stable and known over the
decision horizon, the simple static EOQ model can nd the optimum solution. Both methods fail to consider realistic constraints
regarding supplier capacity, rejections, late deliveries and time
dependent variations in problem parameters. The exact solution
in more general situations has been obtainable by Dynamic Programming (DP). Wagner and Whitin (1958) presented a dynamic
programming solution algorithm for single product, multi-period
inventory lot-sizing problem. Even though DP algorithms
(Aggarwal & Park, 1993; Federgruen & Tzur, 1991; Heady & Zhu,
1994; Silver & Meal, 1973) provide an optimal solution, these are
considered difcult to understand and require high computational
resources.
To our knowledge, there is no multi-period linear programming model available in the literature for procurement lot-sizing
problem which can substitute EOQ model and DP model to
overcome their limitations, and also considers price breaks and
realistic constraints as well as supports Material Requirement
Planning.
This paper applied an integer linear programming approach
to solve multi-period procurement lot-sizing problem for
single product and single supplier considering rejections and
late delivery performance under all-unit quantity discount
environment.

D. Choudhary, R. Shankar / Computers & Industrial Engineering 61 (2011) 13181323

The purpose of this paper is to:

 Develop a mathematical model to establish tradeoffs among
cost objectives and determine appropriate lot-size to procure and its period to minimize total cost over the decision
horizon.
 Investigate the effect of variation in problem parameters
such as rejection rate, demand, storage capacity and inventory holding cost on total cost.
The paper is further organized as follows. Section 2 presents a
brief literature review of the existing quantitative approaches related to procurement lot-sizing problem. In Section 3, an integer
linear programming formulation is developed for multi period procurement lot-sizing problem considering all-unit quantity discounts. Section 4 presents an illustration with solution to
demonstrate the effectiveness of the proposed approach. Finally,
conclusions are provided in Section 5.

2. Literature review
Brahimi, Dauzere-Peres, Najid, and Nordli (2006) presented a
survey of the single item lot-sizing problem for its uncapacitated
and capacitated versions. Karimi, Fatemi Ghomi, and Wilson
(2003) discussed a number of important characteristics of lot-sizing models, including the planning horizon, number of levels, number of products, capacity or resource constraints, deterioration of
items, demand, setup structure and shortage. Ben-Daya, Darwish,
and Ertogral (2008) and Robinson, Narayanan, and Sahin (2009)
proposed different models and classications of the lot-sizing
problem.
Smith, Robles, and Crdenas-Barrn (2009) formulated and
solved a single item joint pricing and production decision problem
over a multi-period time horizon. The objective is to maximize
prots considering capacity and inventory constraints. They consider decision variables, such as sales price, production quantity,
and sales amount for a single item. Buffa and Jackson (1983) proposed a goal programming model considering price, quality and
delivery goals to schedule purchase for single product over a dened planning horizon.
Pratsini (2000) proposed the lot-sizing model with setup learning for the single level, multi-item, capacity constrained case. He
developed a heuristic to analyze the effects of setup learning on
a production schedule. The study revealed that setup learning
can have unexpected results on a product depending on the relative value of its setup to holding cost ratio compared with the ratios of the other products. Benton (1991) developed a non-linear
model and a heuristic solution approach for supplier selection
and lot sizing under conditions of multiple items, multiple suppliers, resource limitations and all-unit quantity discounts. The objective is to minimize the total cost (purchasing, inventory and
ordering costs) subject to an inventory investment constraint and
shortage related constraints. In their article, Raza and Akgunduz
(2008) presented a comparative study of heuristic algorithms on
economic lot scheduling problem (ELSP). They showed that Simulated Annealing algorithm nds the best solution to these ELSP
problems, and outperforms other meta-heuristic technique such
as Dobsons heuristic, hybrid GA, Neighborhood Search heuristics
and Tabu Search.
Polatoglu and Sahin (2000) suggested a multi-period purchasing policy where demand in each period is considered as a random
variable, the probability distribution of which may depend on price
and period. Chaudhry, Forst, and Zydiak (1993) proposed a mathematical formulation to minimize the purchasing cost for individual

1319

item over a single period considering capacity constraints, delivery

performance and quality with quantity discounts. Bender, Brown,
Isaac, and Shapiro (1985) described a procurement problem faced
by IBM to minimize the sum of purchasing, transportation and
inventory cost over the planning horizon for multiple products,
multiple time periods and quantity discounts.
Ustun and Demirtas (2008) proposed an integration of ANP and
achievement scalarizing function to choose the best suppliers and
to nd the optimal order quantities and inventory levels. Liao and
Kuhn (2004) presented a multi-objective optimization model for
single item assuming that all suppliers lots simultaneously arrive
at the beginning of each replenishment period. The objectives are
the minimization of total cost, the total quality rejections and total
late deliveries subject to capacity and demand constraints. Demirtas and Ustun (2009) developed an integrated ANP and GP approach to solve multi-period inventory lot-sizing scenario, for
single product and multiple suppliers. A multi objective mixed
integer linear programming model is proposed to achieve four
goals: budget, aggregate quality, total value of purchasing and demand over the planning horizon. Rezaei and Davoodi (2011) proposed two multi objective mixed integer non-linear models for
multi period lot-sizing problems involving multiple products and
multiple suppliers. Each model is constructed on three objective
functions: cost, quality and delivery. In rst model shortages are
not allowed while second model considered that demand during
the stock-out period is back ordered.
3. Model formulation
The proposed model deals with procurement lot-sizing problem
in which there is a time-varying demand for a single product over
multi-periods.
3.1. Model parameters and decision variables
Following parameters and decision variables are to be adopted
for mathematical formulation.
Parameters:
dt
buyers demand of the product in period t
pmt cost of procuring one unit of product between price
break level m and m + 1 in period t
bm quantity at which all-unit price breaks occur
ot
cost of ordering in period t
tmt cost of transportation of lot-size at price break level m in
period t
qmt percentage of rejected products delivered by supplier at
price break level m in period t
lmt percentage of products late delivered by supplier at price
break level m in period t
Ct
supplier capacity in period t
ht
unit inventory holding cost of the product in period t
w
buyers storage capacity
It
intermediate variable indicates inventory of the product,
carried over from period t to period t + 1
Decision variables:
xmt lot-size (number of units of product) that buyer procures
from supplier at price break level m in period t
ymt binary variable used in separating price levels m for
product in a transaction between buyer and supplier.
This also separates transportation cost per procured lotsize between price break level m and m + 1 in period t
zt
binary variable indicating whether supplier is ordered or
not in period t

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D. Choudhary, R. Shankar / Computers & Industrial Engineering 61 (2011) 13181323

3.2. Model assumptions

The proposed
assumptions:

model

is

constrained

by

the

following

a. Demand of the item is constant and known with certainty

for each period over planning horizon.
b. Shortage or backordering is not allowed.
c. Capacity of supplier is nite.
d. Ordering cost applies for each period in which an order is
placed to the supplier.
e. Carrier-size dependent transportation cost applies for each
period in which lot is procured from supplier.
f. Inventory holding cost applies when product is carried
across a period in the planning horizon.
g. Late delivery is assumed to receive in following period.
h. Rejected products are disposed in the same period at scrap
value and are excluded from inventory which is carried
across a period in the planning horizon.
i. Late deliveries are assumed of perfect quality.
3.3. Mathematical formulation
With above parameters and decision variables, a mathematical
formulation may be stated as follows:

Min Z Z 1 ; Z 2 ; Z 3 
Z1

XX
m

Z2

pmt xmt

1a

ot zt

XX

Z3

t mt ymt

1b

ht I t

1c

Subject to
X
X
X
X
It1
xmt
lmk xmk  dt P
lmt xmt
qmt xmt
m

and k t  1
It It1

xmt

 dt

xmt 6

2
lmk xmk 

X
m

8t and k t  1
T
X

8t

lmt xmt 

qmt xmt

!
dk zt

8m; 8t

kt

bm1;t ymt 6 xmt 6 bmt ymt

xMt 6 C t yMt
X

ymt zt

8m; 8t

8t

8t

It 6 w 8t

8t

It P 0

xmt P 0 and integer

ymt 2 f0; 1g 8m; 8t
zt 2 f0; 1g 8t

8m; 8t

The objective of the model is to minimize the buyers total cost.

The objective function (1) consists of three parts: (1a) the purchasing cost, (1b) the transaction cost, and (1c) the inventory holding
cost for the remaining inventory in each period. The rst term in
equation (1b) represents the ordering cost while second term
means that if a lot-size is procured between price break level m
and m + 1 in period t then there is xed transportation cost associated with chosen carrier depending on carrier size. It may be noted
that ordering cost depends on whether procurement takes place or
not; therefore binary variable zt is used in expression of ordering
cost. Similarly, selection of appropriate carrier depends on lot-size
procured between price break level m and m + 1 in period t; therefore binary variable ymt is used in the expression of transportation
cost.
Constraints (2) and (3) are the inventory balance equations.
They express that the initial inventory (It1) added to the current
periods procurement (xmt) plus previous periods late delivered
products are used to satisfy the demand (dt) without allowing
shortages due to late deliveries (lmtxmt) and imperfect quality
(qmtxmt) items associated with current periods procurement. What
remains after deducting current periods late deliveries and imperfect quality products is kept in stock at the end of period (It). Constrains (4) ensure that buyer cannot place a procurement order
without charging an appropriate ordering cost. Constraints (5)
(7) describe the suppliers all-unit price break schemes. Constraints
(5) ensure that a procured lot from the supplier at a specic price
break is in the discount interval offered. Constraints (6) represent
the restriction on procurement lot size due to capacity of the supplier. Capacity of supplier is assumed to be greater than quantity at
which price break level M is offered i.e. Ct > bMt. Constraints (7) ensure only one price break level is used for the lot-size if it is procured in period t. It may be noted that binary variable zt is used
to activate both the optimal procurement lot size in Constraints
(4) and optimal price break level in Constraints (7). Constrains
(8) represent the restriction on inventory at the end of period
due to buyers space limitation. Finally, Constrains (9)(12) are
used to force non-negative integer values and binary restrictions
in the model.
Computational difculty increases with the number of variables. Moreover, adding more price breaks will make the model
harder to solve because of additional variables required in formulation. However, problems of a reasonable size can be solved using
any commercial software within a few seconds of computer time.

10

4. An illustration
The effectiveness of proposed integer linear programming model, presented in this paper is demonstrated through an illustration.
Demand data of product for six periods are given in Table 1. Product demand is considered stable over planning horizon. Buyers
space availability is assumed to be unlimited. Table 2 provides supplier related data for numerical illustration.
The linear programming software LINGO is used to solve this
problem. While the model can be used in a number of ways, in this
illustration it is used to analyze tradeoffs among cost objectives
and to evaluate the effect of variation in problem parameters such
as holding cost, demand, quality performance etc. on lot-sizing
decision.

Table 1
Buyers product related data for illustration.
Period (t)

11
12

Demand

Holding cost

ht

400

400

400

400

400

400

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D. Choudhary, R. Shankar / Computers & Industrial Engineering 61 (2011) 13181323

Table 2
Supplier data related to product for illustration.

90000
80000

Quantity level

pmt

tmt

lmt

qmt

ot

Ct

Q 6 450
450 < Q 6 750
750 < Q

20
19
18

3550
5000
8000

0.10

0.05

500

1400

70000
60000

Cost

Purchasing cost

50000

Transaction cost

40000

Inventory cost
Total cost

30000

4.1. Analysis of tradeoffs among cost objectives

20000

It is evident from Table 3 that optimal procurement lot-size is

obtained by striking best tradeoffs among multiple cost objectives.
Variation in priority of multiple cost objectives will cause variation
in procured lot-size in each period as shown in Table 3. The procurement lot-size in each period is sensitive with the priority of
multiple objectives.
The rst three solutions in Table 3 are obtained considering
only one of the objectives and the resulting Solutions 1, 2 and 3
are the solutions which minimize Z1, Z2 and Z3, respectively. In
Solutions 1 and 2, a few large size lots are procured to take advantage of price discounts and to minimize transaction cost, respectively. Product is to be procured in small lots to minimize
inventory holding cost as shown in Solution 3. Two-objective solutions are also generated with only two of the objectives to analyze
the tradeoffs among the objectives and results are obtained in
Solution 4 to Solution 6 in Table 3. The last three solutions in Table
3 are obtained for three objectives. Solution 9 was obtained by setting equal weights to each objective. Solution 4 reects similar results as those obtained in Solution 2.
A review of the results reveals a few interesting observations.
Smaller lot-size reduces inventory holding cost but increases purchasing cost and transaction cost. Larger lot-size reduces purchasing cost and transaction cost, and leads to higher inventory cost.
Therefore, decision maker considers tradeoffs among purchasing
cost, transaction cost and inventory holding cost in procurement
lot-sizing decisions to minimize total cost.
Fig. 1 shows the graphical display of solutions for the illustration. Decision makers may choose the best compromising solution

10000
0
Sol. 3 Sol. 5 Sol. 8 Sol. 6 Sol. 1 Sol. 9 Sol. 7 Sol. 2
&4

Fig. 1. Graphical display of solutions for multiple cost objectives.

by considering realistic constraints such as suppliers capacity,

buyers storage capacity and transportation availability. Solutions
68 are such compromising solutions.
Fig. 2 shows the graphical results for Solution 16 and Solution
8 (Table 3) indicating tradeoffs among purchasing cost, transaction
cost and inventory holding cost.

4.2. Analysis to evaluate the effect of variation in problem parameters

In this section, we investigate the effect of variation in problem
parameters on multi-period lot-sizing decision. Table 4 shows that
the ve parameters are varied from current state. Problem set 1
represents variation in holding cost. In Problem set 2 and 3, demand is considered lumpy. It may be noted that total demand during decision horizon is same. Capacity of supplier is taken less than
from the current capacity in Problem set 4. In Problem set 5,
buyers storage capacity is restricted to 250 units. As shown in
Problem set 6, rejection rate of supplier is assumed to be 50% better
than current rejection rate while quality rejections increase by 50%
in Problem set 7.

Table 3
Computational results to indicate tradeoffs among multiple cost objectives.
Solutions

Weights

W1
W2
W3

1
0
0

0
1
0

0
0
1

0.5
0.5
0

0.5
0
0.5

0
0.5
0.5

0.5
0.25
0.25

0.25
0.25
0.5

0.33
0.33
0.33

Objectives

Purchasing cost
Transaction cost
Inventory cost
Total cost

45,486
25,500
5621
76,607

45,486
17,000
22,106
84,592

50,909
25,750
93
76,752

45,486
17,000
22,106
84,592

47,668
33,100
1828
82,596

48,463
20,550
4531
73,544

45,486
17,000
11,656
74,142

49,319
23,150
1933
74,402

47,136
18,050
8094
73,280

Multi-period procurement lot size

x11
x12
x13
x14
x15
x16
x21
x22
x23
x24
x25
x26
x31
x32
x33
x34
x35
x36

0
0
0
0
0
0
0
0
0
0
0
0
843
0
933
0
751
0

0
0
0
0
0
0
0
0
0
0
0
0
1127
1400
0
0
0
0

0
415
422
421
440
400
471
0
0
0
0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0
0
0
0
0
1127
1400
0
0
0
0

0
0
378
0
0
16
471
454
0
451
0
0
0
0
0
0
758
0

0
0
0
450
0
0
577
750
0
0
750
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0
0
0
0
0
1327
0
0
1200
0
0

0
415
441
450
0
0
471
0
0
0
750
0
0
0
0
0
0
0

0
0
0
450
0
0
0
0
0
0
750
0
1327
0
0
0
0
0

1322

D. Choudhary, R. Shankar / Computers & Industrial Engineering 61 (2011) 13181323

60000

50000

Sol. 3

78000

Sol. 5

77000

Sol. 6

76000
75000

40000

Total cost

Sol. 1
Sol. 2 & 4

Cost

Sol. 9

74000
73000
72000

30000

71000
70000

20000

69000
CS

Problem sets

10000

Fig. 3. Effect of variation in problem parameters on total cost.

0
Purchasing cost

Transaction cost

the effect of variation in suppliers capacity and buyers space

availability on multi-period procurement lot-sizing decisions,
respectively. Similarly, from Problem set 6, 50% improvement in
quality rate of supplier from current state leads to decrease in total
cost of buyer by an amount 1688. Problem set 7 shows that total
cost increases due to increase in rejections. These ndings help
the buyer to decide on how much and where to invest in buyer
supplier coordination process.
Fig. 3 shows that procurement lot-sizing model proposed in this
paper is sensitive to the variation in problem parameters. The computational results suggest that the proposed model captures all
realistic constraints in multi-period procurement lot-sizing decision making process and analyzes tradeoffs in cost objectives.

Inventory cost

Fig. 2. Solutions indicating tradeoffs among cost objectives.

Table 4
Description of variation in problem parameters.

a
b

Problem sets

Description

Current state (CS)

New value

1
2
3
4
5
6
7

Holding cost
Demand
Demand
Supplier capacity
Buyer storage capacity
Quality rate
Quality rate

5
Stable
Stable
1400
Unlimited
0.05
0.05

8
Lumpy1a
Lumpy2b
1000
250
0.025
0.075

Lumpy1 means (300, 500, 300, 500, 300, 500).

Lumpy2 means (200, 200, 800, 200, 200, 800).

6. Conclusions
Multi-period procurement lot-sizing decisions simultaneously
determine what quantity is to be procured and in which period it
should be procured so as to minimize total cost by striking tradeoffs among purchasing cost, inventory holding cost and transaction
cost. Lot-sizing decision is also inuenced by quantity discounts,
quality and delivery performance. This paper presents an integer
linear programming approach for procurement lot-sizing problem
in the real world situation. By formulating the multi-period lot-sizing problem as an integer linear programming, we have captured

The optimal solutions for all problem sets of numerical example

are summarized in Table 5. For Problem set 1, due to high inventory holding cost, product is frequently procured in small lots in
comparison with current state. In Problem set 2 and 3, due to lumpy demand, the total cost is less in comparison with current state.
Consideration of multi-period planning horizon allows the buyer to
minimize total cost in lumpy demand scenario by adjusting lotsize and number of orders accordingly. Problem set 4 and 5 show
Table 5
Computational results for different problem sets.
Problem sets

CS

Purchasing cost
Transaction cost
Inventory cost
Total cost
x11
x12
x13
x14
x15
x16
x21
x22
x23
x24
x25
x26
x31
x32
x33
x34
x35
x36

47,136
18,050
8094
73,280
0
0
0
450
0
0
0
0
0
0
750
0
1327
0
0
0
0
0

49,319
23,150
3092
75,561
0
415
441
450
0
0
471
0
0
0
750
0
0
0
0
0
0
0

48,421
20,550
3623
72,594
408
0
0
0
0
0
0
750
0
619
750
0
0
0
0
0
0
0

46,330
21,050
5259
72,639
422
0
0
0
0
0
0
0
0
0
0
0
0
0
1105
0
1000
0

48,463
20,550
4531
73,544
0
0
0
450
0
0
577
750
0
0
750
0
0
0
0
0
0
0

50,889
25,750
103
76,742
0
415
422
421
443
396
471
0
0
0
0
0
0
0
0
0
0
0

45,966
18,050
7576
71,592
0
0
0
450
0
0
0
0
0
0
750
0
1262
0
0
0
0
0

48,007
19,500
7249
74,756
0
0
0
0
0
0
0
0
0
547
750
0
1298
0
0
0
0
0

D. Choudhary, R. Shankar / Computers & Industrial Engineering 61 (2011) 13181323

the realistic constraint at all levels over a nite planning horizon.

The proposed model can support MRP system in realistic
situations.
The computation analysis shows that problem of reasonable
size can be solved using any commercial software in a few seconds
of computer time via the proposed formulation. However, as the
number of quantity discount levels and/or periods increases, the
model could become very large with hundreds of binary variables
and may become computationally intractable. Hence, the future research work may explore exact solution approaches such as branch
and bound or cutting plane methods, or heuristics and approximate algorithms.
Future research might also include several products. If there
were two products, both managed by a single supplier, consolidated shipments of a mixed load could be dispatched to buyer.
Two or more products may allow additional economies in inventory or transportation decisions. Further, the proposed model focuses on the buyers benets. The issue of coordination between
buyer and supplier can also be studied to optimize the whole supply chain benets in a multi-period procurement lot-sizing decision making process.
Acknowledgments
The authors are grateful to the editor and two anonymous referees for their valuable suggestions, which have been of great help
for the improvement of the paper.
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