Int. J. Logistics Systems and Management, Vol. 26, No.

1, 2017 57

Development of an inventory model for two suppliers

with random capacity considering supply disruption

Imtiaz Ahmed*
Department Industrial and Production Engineering
Bangladesh University of Engineering and Technology,
Dhaka, Bangladesh
Email: imtiaz_avi@yahoo.com
Email: imtiazavi@ipe.buet.ac.bd
*Corresponding author

Ineen Sultana
Department of Mechanical and Production Engineering,
Ahsanullah University of Science and Technology,
Dhaka, Bangladesh
Email: ineen.sultana_ipe@yahoo.com

Abdullahil Azeem
Department of Industrial and Production Engineering,
Bangladesh University of Engineering and Technology,
Dhaka, Bangladesh
Email: azeem@ipe.buet.ac.bd
Abstract: Supply disruption occurs for diverse reasons including transportation
problem, equipment failure, raw material shortages, natural calamities etc. As a
result supplier may become unavailable at random times for random time
length. In addition, suppliers may also have random capacities leading to
uncertain yield in orders. Again under random supplier capacities, the retailer
should order from a number of suppliers in order to diversify the risk associated
with shortages. The objective of this paper is to develop an inventory model for
two suppliers with random capacities considering supply disruption. A
modified (Q, r) model is developed to tackle the problem of future supply
uncertainty in response to the demand generated by Poisson process. Two
suitable optimisation algorithms are applied to search for the optimal values of
the decision variables which are state dependent order quantities and reorder
point to minimise the cost per unit time. A hypothetical example and its
solution are then provided to have a better understanding about the
demonstration of the proposed model. Finally, sensitivity analysis is also
carried out to have better insights about the model developed.
Keywords: supply chain management; disruption management; inventory
modelling; random capacity; continuous time Markov chain; supply
uncertainty; genetic algorithm; Nelder-Mead simplex.
Reference to this paper should be made as follows: Ahmed, I., Sultana, I. and
Azeem, A. (2017) ‘Development of an inventory model for two suppliers with
random capacity considering supply disruption’, Int. J. Logistics Systems and
Management, Vol. 26, No. 1, pp.57–84.

Copyright © 2017 Inderscience Enterprises Ltd.

58 I. Ahmed et al.

Biographical notes: Imtiaz Ahmed is currently working as a Graduate

Research Assistant in the Industrial and Systems Engineering Department of
Texas A & M University, USA. He is also pursuing his PhD degree in the same
department. He obtained his BSc in Industrial and Production Engineering in
2012 from the Department of Industrial and Production Engineering of
Bangladesh University of Engineering and Technology (BUET), Dhaka,
Bangladesh. After his BSc degree, he joined in the same department as a
Lecturer and later promoted as an Assistant Professor in 2014. He also obtained
his MSc in Industrial and Production Engineering from the same institution in
2014. His publications have appeared in journals like International Journal of
Advanced Manufacturing Technology, Journal of Intelligent & Fuzzy Systems,
International Journal of Productivity & Performance Management, etc. He is
currently working in the area of data analytics and systems informatics.

Ineen Sultana is currently working as a Graduate Research Assistant in the

Industrial and Systems Engineering Department of Texas A & M University,
USA. She is also pursuing her PhD degree in the same department. She
obtained her BSc in Industrial and Production Engineering in 2012 from the
Department of Industrial and Production Engineering of Bangladesh University
of Engineering and Technology (BUET), Dhaka, Bangladesh. After her BSc
degree, she joined in the Mechanical and Production Engineering Department
of Ahsanullah University of Science and Technology (AUST), Dhaka,
Bangladesh as a Lecturer and later promoted as an Assistant Professor in 2014.
She also obtained her MSc in Industrial and Production Engineering in 2014
from the same department where she obtained her Bachelor degree. Her
publications have appeared in journals like International Journal of Advanced
Manufacturing Technology, Journal of Intelligent & Fuzzy Systems,
International Journal of Productivity & Performance Management, etc.

Abdullahil Azeem is a Professor in the Department of Industrial and Production

Engineering in Bangladesh University of Engineering and Technology,
Bangladesh. He obtained his PhD degree from the University of Western
Ontario, Canada. His research interests include scheduling and inventory
management using artificial intelligence, supply chain management, automated
manufacturing system etc. His publications have appeared in many peer
reviewed journals such as International Journal of Production Economics,
International Journal of Machine Tools and Manufacture, International
Journal of Advanced Manufacturing Technology, Journal of Industrial
Engineering and Management, International Journal of Integrated Supply
Chain Management, Global Journal of Business and Management,
International Journal of Quality and Innovation, etc.

1 Introduction

A supply chain is a system that consists of facilities or entities whose activities involve
the transformation of raw materials into finished products that are later delivered from the
supplier to the end customer. Though conventional supply chains are designed to operate
smoothly in a problem-free environment, in reality unexpected events such as machine
breakdowns, transportation failures, labour strikes, and natural disasters are bound to
happen and are often inevitable. As a result, this may cause disruptions at different levels
of the supply chain, from the upstream to the downstream stages, and the effects are often
destructive. Numerous researchers have carried out research in this field and a good
 Development of an inventory model for two suppliers 59

number of researchers is still working on this field. Interested readers are referred to the
work of Hishamuddin et al. (2012, 2014, 2015), Paul (2015) and Paul et al. (2014, 2015a,
2015b) to have the idea of the some contemporary researches. This field became popular
to the eyes of researchers as Parlar and Perry (1996) pointed out in most inventory
models existed in the literature, one of the implicit assumptions is that the product to be
ordered is always available; that is, when an order is placed it is either received
immediately (the case of zero lead time) or after a deterministic or perhaps random lead
time. However, if the product is purchased from another company then the supply of the
product may sometimes be interrupted due to the reasons stated in above paragraph. So,
suppliers may be unavailable at random times for random time lengths. To tackle this
uncertainty, the production/inventory manager would need to know how much to produce
(or purchase) when the supply is fully available. As a result a number of inventory
models have been proposed in recent years incorporating supply disruptions in their
considerations. Most of these models deal with single supplier where in reality
duopolistic situation is a common phenomenon. Another common assumption of the
existing inventory model is supplier will always deliver the exact quantity as ordered but
in reality suppliers may have random capacity which may result in uncertain yield in
orders. It means that a given order is fully received from a supplier if the order quantity is
less than supplier’s capacity; otherwise, the quantity received is equal to the available
capacity (Erdem et al., 2006). According to them, “just like in portfolio theory, where the
risk-averse investors should diversify their investments, a retailer should diversify his
order between more than one supplier with random capacity to reduce the risk associated
with probable shortages”. Already a good amount of researches have carried out to
develop an inventory model by incorporating the possibility of random yield from single
or multiple suppliers. Though these implicit assumptions stated above have treated
independently and relaxed from the inventory model in numerous studies but the fact is,
almost no previous studies have considered the effects of supply disruption and random
yield from more than one supplier in a single setting. So the objective of this paper is to
incorporate the joint effects of supply disruption and random capacity of suppliers in an
inventory model and take the research one step close to the real scenario.

2 Literature review

For many years there were few implicit assumptions that most of the inventory models
published in the literature used to follow. One is the continuous availability of the supply
whenever needed and another is suppliers will always deliver the exact quantity ordered.
The issue that suppliers may be unavailable at random times for random time lengths and
random capacity of suppliers had never been considered during those years until when
Gerchak et al. (1988) for the first time provided a complete analysis of a general profit
maximising periodic-review production model with variable yield and uncertain demand.
Gerchak and Parlar (1990) identified that existing production/inventory models with
random (variable) yield used to take the yield distribution as given. Their work took a
step towards selecting the optimal yield randomness, jointly with lot sizing decisions.
Parlar and Wang (1993) considered the case of random yield and diversification in two
different inventory models. It was assumed that two sources (suppliers) exist who ship an
amount which was a random function of the amount requisitioned. Since they might
charge different prices and their reliability (in terms of the variance of the yield random
60 I. Ahmed et al.

variable) might be different, diversification might be more desirable than using a single
supplier. They analysed this problem for both the EOQ model and the newsboy model.
They had obtained analytic solutions for the optimal order quantities from two sources
and the minimum average cost (AC) in terms of all the parameter values for the EOQ
model.
Weiss and Rosenthal (1992) developed an optimal inventory policy for EOQ
inventory systems which might have a disruption in either supply or demand. The start of
the disruption was known a priori and it lasted a random length of time. They described
the structure of an optimal policy and presented a procedure for its computation, along
with numerical results. Parlar and Perry (1995) considered a stochastic inventory model
where the quantity ordered sometimes might not be available due to strikes, etc. They
represented the supplier’s availability process as a two-state continuous time Markov
chain where one state corresponded to availability (ON state) and the other state
corresponded to unavailability (OFF state) of the supplier. They relaxed the assumption
of waiting until the inventory level reaches zero and developed an inventory model with
the reorder point as one of the decision variables.
Parlar and Perry (1995) addressed a periodic-review setting, with setup costs, where
the probability that an order placed now would be filled in full, as opposed to not at all,
depends on whether supply was available in the previous period. Parlar and Perry (1996)
considered order-quantity/reorder-point inventory models where the availability of supply
was subject to random fluctuations. Demand from customer end was assumed to be one.
Song and Zipkin (1996) presented an inventory control model which included a
Markovian model of the supply system. Like that supply system the replenishment lead
time would evolve over time. The optimal policy was found out using dynamic
programming and its parameters changed dynamically to reflect current supply
conditions. Erdem and Özekici (2002) argued that when the yield is random, it is often
useful to diversify and use more than one vendor. This decreases the risk of receiving a
very small quantity due to an unexpectedly small capacity of one of the vendors. They
considered a single item inventory model which was observed periodically in a randomly
changing environment. Mohebbi (2003) argued that within the context of inventory
control theory, very little had appeared in the literature that focuses on the issue of
random supply interruptions in inventory systems with non-zero replenishment lead
times, owing to the inherent analytical complexity of such systems. In this paper, he
investigated the issue of random supply interruptions in a continuous-review inventory
system where demands and lead times were stochastic, and stock-outs were lost. Li et al.
(2004) considered a periodic-review inventory system subject to random demand and
unreliable supply. The availability of supply was modelled as an alternating renewal
process with general distributions for the durations of the UP and DOWN cycles. They
considered the lost-sales case and also discussed the backorder case, for both the
discounted and long-run AC criteria.
Mohebbi (2004) considered a continuous-review inventory system with compound
Poisson demand, hyper exponentially distributed lead time, and lost sales where the
supply process might be randomly interrupted depending on the availability of a supplier.
He presented an exact formulation of the long-run AC rate function based on deriving the
stationary distribution of the on-hand inventory, and provided some numerical results.
Xia et al. (2004) presented a general disruption management approach for a two-stage
production and inventory control system. A penalty cost for deviations of the new plan
from the original plan was incorporated and the concept of a disruption recovery time
 Development of an inventory model for two suppliers 61

window was introduced. Throughout the paper managerial insights were presented that
indicated how a company should respond to various types of disruptions during its
operations.
Yang et al. (2005) studied the problem of recovering a production plan after a
disruption, where the disruption might be caused by incidents such as power failure,
market change, machine breakdown, supply shortage, worker no-show, and others. The
new recovery plan they seek after had to not only suit the changed environment brought
about by the disruption, but also be close to the initial plan so as not to cause too much
customer unsatisfaction or inconvenience for current-stage and downstream operations.
Tomlin (2006) studied a single-product setting in which a firm could source from two
suppliers, one that was unreliable and another that was reliable but more expensive.
Suppliers were capacity constrained, but the reliable supplier might possess volume
flexibility. He proved that in the special case in which the reliable supplier had no
flexibility and the unreliable supplier had infinite capacity, a risk-neutral firm would
pursue a single disruption-management strategy: mitigation by carrying inventory,
mitigation by single-sourcing from the reliable supplier, or passive acceptance. Snyder
and Shen (2006) explored the differences between demand and supply uncertainty in
multi-echelon supply chains. They presented several studies, each involving a
fundamental question of order frequency, inventory placement, or supply chain structure.
In each study, they considered a simple multi-echelon supply chain, first under demand
uncertainty and then under supply uncertainty in the form of disruptions. Using
simulation, they demonstrated that the optimal strategy is different under the two types of
uncertainty and discussed reasons for the differences.
Mohebbi and Hao (2008) assumed that an unreliable supplier in a single-item
stochastic inventory system alternates randomly between two possible states (i.e.,
available and unavailable), following a two-state continuous-time homogeneous Markov
chain with a compound Poisson stream of demands and Erlang lead times. They derived
the stationary distribution of the on-hand inventory under a continuous-review policy and
provided some numerical results. Ross et al. (2008) considered a firm that faced random
demand and receives shipments from a single supplier who faced random supply. The
supplier’s availability might be affected by events such as storms, strikes, machine
breakdowns, and congestion due to orders from its other customers. In their model, they
considered a dynamic environment: the probability of disruption, as well as the demand
intensity, could be time dependent. They modelled this problem as a two-dimensional
non-homogeneous continuous-time Markov chain (CTMC), which they solved
numerically to obtain the total cost under various ordering policies. Yan and Liu (2009)
considered the problem of joint replenishment and pricing for a single product with two
suppliers and supply disruption. Their objective was to maximise the total profit by
choosing an appropriate replenishment and pricing policy. They obtained that the form of
the optimal policy and analysed how supply disruption affected the profit function and
the optimal policy. Schmitt and Snyder (2012) considered a firm facing supply chain risk
in two forms: disruptions and yield uncertainty. They demonstrated the importance of
analysing a sufficiently long time horizon when modelling inventory systems subject to
supply disruptions. They demonstrated that a single-period approximation caused
increase in cost, under-utilised the unreliable supplier, and distorted the order quantities
that should be placed with the reliable supplier in the two-supplier case. Samvedi and
Jain (2012) sorted out the effect of sharing forecast information on the performance of a
supply chain experiencing disruptions. The supply chain was modelled on the lines of the
62 I. Ahmed et al.

famous beer game scenario and was simulated by subjecting it to frequent demand and
supply disruptions. The forecast sharing was tested at different levels, ranging from
sharing between just conjugate players to sharing the retailer data with all the players,
and the results showed that even less amount of sharing the forecasted information helps
the chain to improve its performance.
Hishamuddin et al. (2012) presented a newly developed disruption recovery model
for a single stage production and inventory system, where the production was disrupted
for a given period of time during the production up time. The model was categorised as a
constrained nonlinear optimisation program which they had solved using an efficient
heuristic developed in this paper. Chen et al. (2012) considered a periodic-review
inventory system with two suppliers: an unreliable regular supplier that might be
disrupted for a random duration, and a reliable backup supplier that could be used during
a disruption. The backup supplier charged higher unit purchasing cost and fixed order
cost when compared to the regular supplier. Sawik (2013) considered the selection and
protection of part suppliers and order quantity allocation under disruption risks. He
argued that the decision maker needs to select and protect suppliers against disruptions
and to allocate order quantity among the selected suppliers and the inventory among the
protected suppliers to minimise total cost of supplier protection, inventory holding,
ordering, purchasing and shortage of parts and to mitigate the impact of disruption risks.
A portfolio approach and bi-objective stochastic mixed integer programming with
conditional value-at-risk were applied to control the risk of worst-case cost.
Baghalian et al. (2013) developed a stochastic mathematical formulation for
designing a network of multi product supply chains comprising several capacitated
production facilities, distribution centres and retailers in markets under uncertainty. Their
model considered demand-side and supply-side uncertainties simultaneously, which
made it more realistic in comparison to models in the existing literature. Costantino et al.
(2014) developed a simulation model for a four-echelon supply chain to evaluate the
information sharing policy and to compare it with an order-up-to level policy,
determining the dynamics of ordering and inventory before and after the disruption. The
results showed how their suggested approach was successful in recovering the disrupted
supply chain to a stable performance by reducing effects on inventory and ordering
patterns. Hishamuddin et al. (2014) paper presented a newly developed real-time
recovery mechanism for a two stage serial supply chain system, consisting of one
manufacturer and one retailer, where the production is disrupted for a given period of
time during the production up time. Their model was capable of determining the recovery
schedule for the manufacturer and the retailer, and ensuring that the total relevant costs
are minimised, while seeking to recover the original schedule by the end of the recovery
time window. Peng et al. (2014) argued that post-seismic inventory and logistics planning
under incomplete and fuzzy information is an important yet understudied area in supply
chain risk management. So they proposed a system dynamics model to analyse the
behaviours of disrupted disaster relief supply chain by simulating the uncertainties
associated with predicting post-seismic road network and delayed information.
Hishamuddin et al. (2015) did a simulation study for a three stage supply chain
system with multiple suppliers subject to unexpected disruptions Two types of
disruptions were considered, namely supply and transportation disruption. The objective
of the study was to examine the effects of disruption on the systems’ total recovery costs
and other performance measures. Sawik (2015) proposed a stochastic mixed integer
programming formulation for integrated supplier selection and production and
 Development of an inventory model for two suppliers 63

distribution scheduling in the presence of supply chain disruption risks. The

suppliers considered located in different geographic regions and the supplies are subject
to multi-level local disruptions of each supplier individually and to two-level regional
disruptions of all suppliers in the same region. Sarkar and Kumar (2015) explored the
effects of communicating disruption information in real-time to supply chain members
using the beer distribution game in a controlled laboratory setting and suggested that
manufacturers should share supply disruption information in real-time in order to benefit
from a reduced bullwhip effect and its associated costs.

3 Proposed inventory model

3.1 Problem identification

A vast amount of researches have already been conducted based on the nature of
suppliers’ performance when received an order from the manufacturers/retailers. Random
disruptions and random capacity of suppliers are continuously being addressed in the
literature now and then. But the following gaps are observed in the literature on this
subject which are addressed in the paper.

1 Most of the papers addressing the issue of suppliers’ random availability deal with
only one supplier.

2 Though very few papers considered two or multiple suppliers they assumed the
demand from the retailers/end customers as unit (= 1) for simplicity.

3 Almost all of the disruption models did not consider the suppliers random capacity.
Though researchers separately addressed the issue of random capacity of suppliers
for different inventory model, these two conceptions namely suppliers’ disruption
and random capacity have not yet been considered in a single inventory model.

4 So far in the literature in case of suppliers’ disruption when both suppliers are
available the diversification issue is not yet addressed.

3.2 Problem statement and assumptions

A manufacturer maintains two suppliers whose supply become randomly disrupted at
random times and remain off for random lengths of time. Even if the suppliers are
available they will not always be able to deliver the exact quantity ordered. As their
capacity is random they will either deliver the quantity ordered or less than that
depending on their capacity distribution. The manufacturer is looking for an appropriate
ordering policy to minimise his total inventory cost. The manufacturer used to backorder
his demands if they cannot be met at time. Some assumptions are made about the
situation described above and ordering policy.
• manufacturer has no prior idea about the availability and unavailability of either of
the suppliers
• demand from the retailers/end customers generated according to Poisson process
64 I. Ahmed et al.

• the length of the ON periods (when they are available) and OFF periods (when they
are not available) of the suppliers are exponential random variable which means the
hazard rates of the ON and OFF period is constant
• capacity of the suppliers are random and exponentially distributed
• when both suppliers are available order is diversified between them
• the delivery lead time is taken as zero as it happens to be small compared to the
average length of the supply disruptions
• per order cost is same for both of the suppliers
• reorder point is a non-negative decision variable.

3.3 Model development

At first an inventory model has been developed for a single supplier and later for two
suppliers. The assumptions made earlier hold for both single supplier and two suppliers’
model.

3.3.1 Single supplier case

According to the work of Parlar and Perry (1995), a stochastic demand inventory system
is considered for a supplier whose supply can be randomly disrupted for periods of
random duration. According to the assumptions made earlier the demand generated from
customer is a Poisson process with parameter α which represents the average demand per
unit time. At any time t, the state of the system can either be ON or OFF depending on
whether the supplier is available or not. To denote the ON and OFF state 0 and 1 is used
throughout this paper. Thus the model can be formulated as two state (0 and 1) CTMC.
According to the assumptions, the length of duration of ON and OFF periods are both
exponentially distributed random variable denoted respectively as X and Y with
parameters λ and µ. When an order is placed and the state is ON, an order cost of $k/order
is incurred. Holding cost is $h/unit/time, and the shortage (backorder) cost is $π/unit
when the state is OFF and the demand cannot be met. For the sake of generality, time
dependent part of the backorder cost as $πˆ /unit/time is also included. Figure 1 depicts a
realisation of the inventory-level process with the above assumptions.
Based on the assumptions made earlier, supplier has random capacity and it follows
exponential distribution with parameter θ having distribution function F(x) (F(x) = 1 –
exp (–θx)). From now on, the amount delivered by the supplier is going to be denoted as
E(q) throughout this paper. The ordering policy used is: when the inventory level drops to
r, if the supplier is ON, an order for q units is placed. But the interesting fact is the order
received will be E(q) as the supplier has random capacity following exponential
distribution. It will increases the inventory to E(q) + r; that is the (q, r) policy is used
when the supplier is available. If the supplier is OFF when the inventory drops to r, then
the decision maker has to wait until the supplier becomes available (ON) before an order
can be placed. In other words, an (s, S)-type order-up-to E(q) + r policy is used after the
supplier becomes available again. As the demand follows Poisson distribution and its
parameter α represents average demand per unit time, received E(q) amount will be last
for the period E(q)/α.
 Development of an inventory model for two suppliers 65

Figure 1 Inventory level and status process with a single supplier

In inventory models with stochastic elements such as considering here, it is useful to

identify the regenerative cycles for the purpose of constructing the (AC) objective
function. Referring to Figure 1, it is found that cycles of this process start when the
inventory goes up to a level of E(q) + r units. Once the cycle is identified, the renewal
reward theorem (RRT) (Ross, 1983) can be used to construct the AC objective function
as a ratio of the expected cost per cycle to the expected cycle length; that is,
C00 E (cost per cycle)
AC (q, r ) = = (1)
T00 E (cycle lenght )

3.3.1.1 Calculation of transient probabilities

Supply uncertainties have been modelled in the literature by using stochastic lead times.
Before developing the objective function, the probabilities Pij(t) = Pr {being in state j at
time t starting in state i at time 0}, i, j = 0, 1, needed to be defined. The transient
probabilities P00(q) and P01(q) are well known for this two-state CTMC (Ross, 1983) and
they are obtained as
P00 (q) = P0 + Pe
1
− ( λ + μ )t
(2)

P01 (q ) = P1 + Pe
1
−( λ + μ )t
(3)

μ
P0 = (4)
λ+ μ

μ
P1 = (5)
λ+ μ

Here, t represents time when inventory will again drop down to the re order point r after
receiving E(q) amount from the supplier. Now, if X is the time when inventory level hits
reorder point and fx(x) is its probability density function, then
66 I. Ahmed et al.

∞ ⎧⎛ λ ⎞
[1 − e− ( λ + μ ) x ] f x ( x) ⎫⎬ dx
P01 = ∫
0
⎨⎜ ⎟
⎩⎝ λ + μ ⎠ ⎭
(6)

Because demand is a Poisson process, X is distributed Erlang with parameter α and E(q)
where
α (α x) E ( q ) −1 e−α x
f x ( x) = , x>0 (7)
ΓE (q)

We thus have
⎛ λ ⎞ α ∞
P01 = ⎜ ⎟ ∫ {[1 − e−( λ + μ ) x ] (α x) E (q )−1 e−α x } dx (8)
⎝ λ + μ ⎠ ΓE ( q ) 0

⎡ ∞
⎛ λ ⎞ α ⎤
⎛
P01 = ⎜
λ ⎞ 1 ⎢
⎢
∫ 0
y E ( q ) −1e − y dx − ⎜ ⎟
⎝ λ + μ ⎠ ΓE (q) ⎥
⎥
⎟
⎝ λ + μ ⎠ ΓE ( q ) ⎢ ∞ ⎥
⎢ ∫ {[e−( λ + μ ) x ] (α x) E (q )−1 e−α x } dx ⎥ (9)
⎣ 0 ⎦
λ ⎡ ⎛ ⎤
E (q)
α ⎞
P01 = ⎢1 − ⎜ ⎟ ⎥
λ + μ ⎣⎢ ⎝ α + λ + μ ⎠ ⎦⎥
P00 = 1 − P01 (10)

3.3.1.2 Calculation of cycle cost

The ordering and holding cost for a single interval which starts with an inventory of
E(q) + r and ends with r units is

hE (q ) ⎡ E (q) + r + r ⎤ hE ( q 2 ) hE (q )r
A ( E (q ), r ) = k + = k + + (11)
α ⎢⎣ 2 ⎥⎦ 2α α
E (q) = 1 θ (1 − e −θq ) (Erdem et al., 2006) (12)

E ( q 2 ) = 2 θ (1 − (1 + θq )e −θq )
2
(13)

So, the total cost of the cycle (starts with state 0 and end with state 0) is

C00 = P00 ( E (q ) ) A ( E (q ), r ) + P01 ( E (q ) ) ⎡⎣ A ( E (q), r ) + C10 (r ) ⎤⎦ (14)

The reason behind the above is when inventory level drops to r, the state will be ON (0)
with probability P00(E(q)) and 1(OFF) with probability P01(E(q)). If the state is ON, the
cost incurred will only be holding and inventory cost which is weighed by the probability
of the event P00(E(q)). On the other hand, if the state is OFF and inventory drops to r, the
cost will be the summation of inventory and holding cost and the cost that incurred from
the time when inventory drops to r and state is OFF to the beginning of the next cycle
(again ON state), this cost is termed as C10.
C00 = A ( E , (q ), r ) + P01 ( E (q) ) C10 (r ) (15)
 Development of an inventory model for two suppliers 67

⎛ r + r − yα ⎞
C10 = hy ⎜ ⎟ yα < r (16)
⎝ 2 ⎠
hr 2 y − r /α
=
2α
+ π ( yα − r ) + πˆ
0 ∫ ( yα − r ) dy yα ≥ r
(17)
hr 2 ⎛ y 2α 3r 2 ⎞
= + π ( yα − r ) + πˆ ⎜ + − 2 yr ⎟
2α ⎝ 2 2α ⎠
So that
− μr
⎡ πr
ˆ hα πα πˆα ⎤ hr hα
C10 (r ) = e α
⎢− μ + μ2 + μ + μ2 ⎥ + μ − μ2 (18)
⎣ ⎦

3.3.1.3 Calculation of cycle length

The formulation of objective function requires another thing which is the length of one
cycle termed as T00. It can be calculated using the following equation
E (q) ⎡ E (q) ⎤
T00 = P00 (q ) + P01 (q) ⎢ + T10 ⎥ (19)
α ⎣ α ⎦
E (q) P01
T00 = + (20)
α μ

So, the AC objective function now can be written as

C00 A ( E (q ), r ) + P01 ( E (q ) ) C10 (r )
AC ( E (q ), r ) = = (21)
T00 E (q ) P01
+
α μ

3.3.2 Two supplier case

From now on, it is going to be assumed that the model consists of two suppliers rather
than one. Like the previous model, their length of duration of ON and OFF periods are
now also exponentially distributed with parameters λ1 and μ1 corresponding to supplier 1
and λ2 and μ2 corresponding to supplier 2. The status of the system can be any of the
following mentioned in table 1 at any time but at time t = 0 it will must in state 0.
Table 1 Possible states of the suppliers

State Status of supplier 1 Status of supplier 2

0 ON ON
1 ON OFF
2 OFF ON
3 OFF OFF

As there are four states now it is logical to have state respective three order quantities for
state 0, 1, 2 and to have three reorder quantities. For simplicity the model is going to be
developed for four decision variables which are qi = (q0, q1, q2) as state dependent order
quantities and only one common reorder level, r. Another important factor is what to do
68 I. Ahmed et al.

when both suppliers are available at state 0. There are three possible solutions. The entire
order quantity for state 0 which is q0 could be given to either one of the two available
suppliers or it could be diversified into both of the two suppliers. As suppliers have
random capacities it will be more justified for the retailer to diversify the order between
available suppliers to reduce the risk associated with shortages. Hence two more variable
will come into the model namely, q0′ (quantity ordered from supplier 1) and q0′′ (quantity
ordered from supplier 2) when both suppliers are available. Just like the single supplier
model random capacities of the two suppliers are also exponentially distributed in this
model with parameters θ1 and θ2. So the policy that retailer is going to follow is denoted
by (q (3) , r ) = (q0 (q0′ , q0′′ )q1 , q2 , r ) which means he will order q0 units when inventory
drops to r and both suppliers are available (state 0) but diversify his order into supplier 1
(q0′ ) and supplier 2(q0′′ ), in case of state i (i = 1, 2) he will order qi units when inventory
drops to r. In case of state 3 when both suppliers are off he will order nothing and wait
either any or both of the suppliers become available again. As soon as that happens he
will order to make the inventory E(qi) + r; i = 0, 1, 2. So, just like the previous model, the
AC objective function is
C00 E[Cost per cycle]
AC ( q0 ( q0′ , q0′′ ) , q1 , q2 , r ) = = (22)
T00 E[lenght per cycle]

3.3.2.1 Calculation of transient probabilities

Let P(t) = [Pij(t)], t ≥ 0, i, j = 0…3 be the 4 × 4 matrix of transition functions for the
CTMC. There is a special way of deriving these transient probabilities which is known as
Kolmogorov forward equations. This is a system of ordinary differential equations
governing the behaviour of the probabilities Pij(t). The structure of the equation is as
following

Pij′ (t ) = φ( j ) Pij (t ) + ∑ y≠ j
Piy (t )φ( y, j ) (23)

where y represents some middle state in between i and j and φ represents the rate out of
any state. However, the 16 Kolmogorov equations can be put in a more convenient matrix
differential form as
P ′(t ) = P (t )Q with P (0) = I (24)

where
⎡ − ( λ1 + λ2 ) λ2 λ1 0 ⎤
⎢ ⎥
μ2 − ( λ1 + μ2 ) 0 λ1
Q=⎢ ⎥ (25)
⎢ μ1 0 − ( λ1 + μ1 ) λ2 ⎥
⎢ ⎥
⎣⎢ 0 μ1 μ2 − ( μ1 + μ2 ) ⎦⎥

Here Q is called the generator or infinitesimal generator or generator matrix of the

Markov chain. The formal solution of above matrix differential equation is P(t) = eQt
∞ t nQn
where ∑n =0 n !
and
 Development of an inventory model for two suppliers 69

Q = UHU −1 (26)

where U is a non-singular matrix formed with the right eigenvectors of Q, and H is the
diagonal matrix. To find the eigenvectors of Q, it is needed to find the eigenvalues of Q
at first, which is obtained as the solution of the characteristic equation
det(Q − ωI ) = 0;

solving gives
ω0 = 0, ω1 = − ( λ1 + μ1 ) , ω2 = − ( λ2 + μ2 ) , ω3 = − ( λ1 + μ1 + λ2 + μ2 ) ;

Using the above eigenvalues, eigenvectors are determined and U matrix is formed as
following
⎡1 1 1 1 ⎤
⎢1 1 − μ2 λ2 − μ2 λ2 ⎥
U =⎢ ⎥ (27)
⎢1 − μ1 λ1 1 − μ1 λ1 ⎥
⎢ ⎥
⎣1 − μ1 λ1 − μ2 λ2 − μ1 μ2 − λ1 λ2 ⎦

If

Q = UHU −1 , then Q n = (UH nU −1 ) (28)

The final equation for the determination of transient probabilities are obtained as
following
(UH nU −1 ) t n
∑
∞
P (t ) = = UD(t )U −1 (29)
n=0 n!
where
⎡1 0 0 0 ⎤
⎢ 0 e −( λ1 + μ1 )t 0 0 ⎥
D(t ) = ⎢ ⎥ (30)
⎢0 0 e −( λ2 + μ2 )t 0 ⎥
⎢ − ( λ1 + μ1 + λ2 + μ2 )t ⎥
⎣0 0 0 e ⎦
Here, time (t) used in the diagonal entry of the above matrix depends on both distribution
followed by the consumption and the received order quantity that will be consumed. As
consumption of received order quantity follows Erlang distribution, in case of the order
quantity when both suppliers are available (E(q0)), the D11 will be derived from the
following equation
E ( q0 )
α ⎧ ∞
[ e−( λ1 + μ1 ) x ] (α x) E ( q0 )−1 e−α x ⎫⎬ dx = ⎛⎜ α ⎞
D11 = ⎨
ΓE ( q0 ) ⎩ ∫
0 ⎭ ⎝ α + λ1 + μ ⎟
1⎠

Similarly,
E ( q0 ) E ( q0 )
⎛ α ⎞ ⎛ α ⎞
D22 = ⎜ ⎟ , D33 = ⎜ ⎟
⎝ α + λ2 + μ 2 ⎠ ⎝ α + λ1 + μ1 + λ2 + μ2 ⎠
70 I. Ahmed et al.

So in case of consumption of (E(q0)) or in calculation of transition probability from state

0 (both suppliers available) to any other state, following D(t) will be used

⎡1 0 0 0 ⎤
⎢ E ( q0 ) ⎥
⎢ ⎛ α ⎞ ⎥
⎢0 ⎜ α + λ + μ ⎟ 0 0 ⎥
⎢ ⎝ 1 1⎠
⎥
D(t ) = ⎢ ⎛ α ⎞
E ( q0 ) ⎥ (31)
⎢0 0 ⎜α + λ + μ ⎟ 0 ⎥
⎢ ⎝ 2 2 ⎠ ⎥
⎢ E ( q0 ) ⎥
⎢ ⎛ α ⎞ ⎥
⎢0 0 0 ⎜α + λ + μ + λ + μ ⎟ ⎥
⎣ ⎝ 1 1 2 2 ⎠ ⎦

Similarly in case of consumption of (E(q1)) or in calculation of transition probability

from state 1 (supplier 1 available) to any other state, following D(t) will be used

⎡1 0 0 0 ⎤
⎢ E ( q1 ) ⎥
⎢ ⎛ α ⎞ ⎥
⎢0 ⎜ α + λ + μ ⎟ 0 0 ⎥
⎢ ⎝ 1 1⎠
⎥
D(t ) = ⎢ ⎛ α ⎞
E ( q1 ) ⎥ (32)
⎢0 0 ⎜α + λ + μ ⎟ 0 ⎥
⎢ ⎝ 2 2 ⎠ ⎥
⎢ E ( q1 ) ⎥
⎢ ⎛ α ⎞ ⎥
⎢0 0 0 ⎜α + λ + μ + λ + μ ⎟ ⎥
⎣ ⎝ 1 1 2 2 ⎠ ⎦

And in case of consumption of (E(q2)) or in calculation of transition probability from

state 2 (supplier 2 available) to any other state, following D(t) will be used

⎡1 0 0 0 ⎤
⎢ E ( q2 ) ⎥
⎢ ⎛ α ⎞ ⎥
0
⎢ ⎜α + λ + μ ⎟ 0 0 ⎥
⎢ ⎝ 1 1⎠
⎥
D(t ) = ⎢ ⎛ α ⎞
E ( q2 ) ⎥ (33)
⎢0 0 ⎜α + λ + μ ⎟ 0 ⎥
⎢ ⎝ 2 2 ⎠ ⎥
⎢ E ( q2 ) ⎥
⎢ ⎛ α ⎞ ⎥
⎢0 0 0 ⎜α + λ + μ + λ + μ ⎟ ⎥
⎣ ⎝ 1 1 2 2 ⎠ ⎦

P (t ) = UD(t )U −1 (34)

The long run probabilities Pj = limt→∞ Pij(t) are

1
[ P0 P1 P2 P3 ] = [ μ1 μ2 , λ2 μ1 , λ1 μ2 , λ1 λ2 ] (35)
( λ1 + μ1 )( λ2 + μ2 )
 Development of an inventory model for two suppliers 71

Figure 2 Inventory level and status process with two suppliers

3.3.2.2 Calculation of the cycle cost

Like previous, the development of C00 which is the cost of one cycle, needs the ordering
and holding cost to be defined at first. Unlike previous now the model has three state
dependent ordering and holding cost Ai, where i = 0, 1, 2.

h ⎡ E ( q0′2 ) + E ( q0′′2 ) ⎦⎤ h ⎡⎣ E ( q0′ ) ∗ E ( q0′′ ) ⎤⎦

A ( E ( q0 ) , r ) or A0 = k + k + ⎣ +
2α α
h ⎡⎣ E ( q0′ ) + E ( q0′′ ) ⎤⎦ r
+
α
where

E ( q0′ ) = 1 θ0′ (1 − e −θ0′ q0′ ) (36)

E ( q0′′ ) = 1 θ0′′ (1 − e −θ0′′q0′′ ) (37)

E ( q0′2 ) = 2 θ0′2 (1 − (1 + θ0′ q0′ ) e −θ0′ q0′ ) (38)

E ( q0′′2 ) = 2 θ0′′2 (1 − (1 + θ0′′q0′′ ) e −θ0′′q0′′ ) (39)

hE ( q12 ) hE ( q1 ) r
A ( E ( q1 ) , r ) or A1 = k + + (40)
2α α
where

E ( q1 ) = 1 θ1 (1 − e −θ1q1 ) (41)

E ( q12 ) = 2 θ12 (1 − (1 + θ1q1 ) e −θ1q1 ) (42)

hE ( q22 ) hE ( q2 ) r
A ( E ( q2 ) , r ) or A2 = k + + (43)
2α α
72 I. Ahmed et al.

where

E ( q2 ) = 1 θ2 (1 − e −θ2 q2 ) (44)

E ( q22 ) = 2 θ22 (1 − (1 − θ2 q2 ) e −θ2 q2 ) (45)

Here θ0′ = θ1 and θ0′′ = θ2 .

Now let’s define Ci0 = E (cost incurred to the beginning of the next cycle from the
time when inventory drops to r at state i = 0…3 and qi units are ordered if i = 0, 1 or 2].
Then,

Ci 0 = Pi 0 ( E ( qi ) ) A ( E ( qi ) , r )
i = 0,1, 2 (46)
∑ Pij ( E ( qi ) ) ⎡⎣ A ( E ( qi ) , r ) + C j 0 ⎤⎦ ;
3
+
j =1

Now using above equation cycle cost C00 can be written as

C00 = P00 ( E ( q0 ) ) A ( E ( q0 ) , r ) + ∑ P0 j ( E ( q0 ) ) ⎡⎣ A ( E ( q0 ) , r ) + C j 0 ⎤⎦ ;
3
(47)
j =1

The equations of C10 and C20 can be obtained in the similar way and have similar
interpretations. But equation of C30 is obtained as following
μ1 μ2
C30 = [C + C10 ] + [C + C20 ] (48)
μ1 + μ2 μ1 + μ2

Here C is defined as expected cost from the time inventory drops to r until either
supplier 1 or 2 become available and it is computed just like C10 is computed in single
supplier model as follows
r
⎛ r + r − yα ⎞ − δy
C= ∫ 0
α
hy ⎜
⎝ 2
⎟δe dy
⎠
∞ ⎡ hr 2 ⎛ y 2α 3r 2 ⎞⎤
+ ∫ r
α
⎢
⎣ 2α
+ π ( yα − r ) + πˆ ⎜
⎝ 2
+
2α
− 2 yr ⎟ ⎥ δe − δy dy
⎠⎦
(49)

− δr
⎡ πr ˆ hα πα πˆα ⎤ hr hα
=e α
⎢⎣ − δ + δ 2 + δ + δ 2 ⎥⎦ + δ − δ 2

Here δ = µ1 + µ2 is the rate of departure from state 3. The reason behind this is, the case
of retailer reaching reorder point r and finds him in state 3 (both suppliers are
unavailable) is just similar to the C10 in the single supplier model. As a result they are
calculated in the same way. But the cost C30 is not as same as C10. Because upon reaching
state 3 it could possible go back to either 1 or 2 depending on the distribution of their
disruption duration. If state 1 is reached then total cost will be C + C10 and if state 2 is
reached total cost will be C + C20 . The probability of a transition from state 3 to 1 is
∞ μ1
P (Y1 < Y2 ) = ∫ 0
P (Y1 < Y2 given Y2 = t ) μ2 e − μ2t dt =
μ1 + μ2
(50)
 Development of an inventory model for two suppliers 73

∑
2
C30 = C + ρi Ci 0 (51)
i =1

μi
ρi = (52)
δ
The linear systems of equations (Ci0) can be rearranged in matrix form

⎡1 − P01 − P02 − P03 ⎤ ⎡C00 ⎤ ⎡ A0 ⎤

⎢0 1 − P ⎢ ⎥
⎢ 11 − P12 − P13 ⎥⎥ ⎢⎢C10 ⎥⎥ ⎢ A1 ⎥
= (53)
⎢ 0 − P21 1 − P22 − P23 ⎥ ⎢C20 ⎥ ⎢ A2 ⎥
⎢ ⎥⎢ ⎥ ⎢ ⎥
⎣ 0 − ρ1 − ρ2 1 ⎦ ⎣C30 ⎦ ⎢⎣C ⎥⎦

μ1 μ2
C30 = [C + C10 ] + [C + C20 ] (54)
μ1 + μ2 μ1 + μ2

∑
3
C00 = − A0 + P0 j C j 0 (55)
j =1

Substituting the value of equation in the row 2 and row 3 and by rearranging following
can be obtained
⎡ 1 − P11 − P13 ρ1 − ( P12 + P13 ρ2 ) ⎤ ⎡ γ1 ⎤ ⎡ A1 + P13C ⎤
⎢ ⎥⎢ ⎥ = ⎢ ⎥ (56)
⎣ − ( P21 + P23 ρ1 ) 1 − P22 − P23 ρ2 ⎦ ⎣ γ2 ⎦ ⎣ A2 + P23C ⎦
where
[ γ1 , γ2 ] ′ = [C10 C20 ] ′ (57)

From the above matrix the value of γ1 and γ2 can be easily obtained. Now using these
newly obtained values and using equation (55). C00 can be now calculated as following
which is much easier and simple than the previous recursive complicated formula.

C00 = A0 + P01γ1 + P02 γ2 + P03 ( C + ρ1γ1 + ρ2 γ2 ) (58)

3.3.2.3 Calculation of the cycle length

The final AC objective has two components, one of which (cost of the cycle C00) is
already defined. So remaining is length of the cycle (T00). Now let’s define Ti0 = E
(time to the beginning of the next cycle from the time when inventory drops to r at state
i = 0…3 and qi units are ordered if i = 0, 1 or 2). Then,

E ( qi ) ⎡ E ( qi ) ⎤
Ti 0 = Pi 0 ( E ( qi ) ) ∑ Pij ( E ( qi ) ) ⎢
3
+ + T j 0 ⎥ ; i = 0,1, 2 (59)
α j =1 ⎣ α ⎦

E ( q0 ) ⎡ E ( q0 ) ⎤
T00 = P00 ( E ( q0 ) ) ∑ P0 j ( E ( q0 ) ) ⎢
3
+ + Tj0 ⎥ ; (60)
α j =1 ⎣ α ⎦
The equations of T10 and T20 can be obtained in the similar way and have similar
interpretations. But equation of T30 is obtained as following
74 I. Ahmed et al.

μ1 μ2
T30 = [T + T10 ] + [T + T20 ] (61)
μ1 + μ2 μ1 + μ2

Here T = 1 / ( μ1 + μ2 ) is the expected duration from the time when inventory drops to r
until either supplier 1 or 2 becomes available.
μ1
P (Y1 < Y2 ) = (62)
μ1 + μ2

In a similar way probability of reaching state 3 to state 2 can be calculated. Multiplying

these probabilities with their respective time and taking summation of them actually
resulted to the equation (61). This equation can be shortened further and written as

∑
2
T30 = T + ρiTi 0 (63)
i =1

E ( q0 )
T00 = + P01 β1 + P02 β 2 + P03 (T + ρ1 β1 + ρ2 β 2 ) (64)
α
where the pair [β1, β2]′ = [T10, T20]′ solves the system

⎡ E ( q1 ) ⎤
+ P13T ⎥
⎡ 1 − P11 − P13 ρ1 − ( P12 + P13 ρ2 ) ⎤ ⎡ β1 ⎤ ⎢ α
⎢ ⎥⎢ ⎥ = ⎢ ⎥ (65)
⎣ − ( P21 + P23 ρ1 ) 1 − P22 − P23 ρ2 ⎦ ⎣ β 2 ⎦ ⎢ E ( q2 ) + P T ⎥
⎢ 23 ⎥
⎣ α ⎦

3.3 Final optimisation model

So, as both cost per cycle, C00 and length of the cycle T00 is defined, the AC objective
function now can be written as
C00
AC ( q0 ( q0′ , q0′′ ) , q1 , q2 , r ) =
T00
A0 + P01γ1 + P02 γ2 + P03 ( C + ρ1γ1 + ρ2 γ2 ) (66)
=
E ( q0 )
+ P01β1 + P02 β 2 + P03 (T + ρ1β1 + ρ2 β 2 )
α
The objective is to minimise the above equation and to get the optimum values of the
decision variables.

4 Numerical example and solution

4.1 Numerical example

In this section, a numerical example is presented to illustrate the solution process of the
proposed inventory model. The example is almost similar to the example provided by
Parlar and Perry (1996). A manufacturer maintains two suppliers whose capacity is
exponentially distributed with parameter respectively as 0.025 and 0.05. These two
 Development of an inventory model for two suppliers 75

suppliers used to become unavailable at random times and remain such for random time
lengths. Manufacturer has no prior knowledge about whether they will be available or
not. Due to this manufacturer often faces troubles and fails to meet the demand of their
customers in time. As a result in recent years they are facing not only economic losses
but it is also hampering their image. However they are trying to sort out this problem and
develop a special ordering strategy to recover from their present status. From the
historical data, with the help of statistical goodness of fit test they have found that their
suppliers length of ON (available) and OFF (unavailable) periods are exponentially
distributed with parameters (0.25 and 2.5) for supplier 1 and (1 and 0.5) for supplier 2
respectively. Ordering cost is same for both of the suppliers and it is $10/order. Holding
cost/unit/time for the manufacturer is $5. Manufacturer used to backorder to their
customers. The per unit component of the backorder cost is $250 and time component is
$25/unit/time. The demand for the quantity received from the supplier is identified as a
Poisson process with average rate of demand as 5.
Table 2 Initial values of the parameters for the hypothetical numerical example

Input parameters Values Input parameters Values

h 5 λ2 1
k 10 µ2 0.5
π 250 θ1 0.025
π̂ 25 θ2 0.050
λ2 0.25 α 5
µ1 2.5

The manufacturer is planning to use the modified (Q, r) policy developed in this paper for
two suppliers and determines the optimal values of the decision variables that will lower
the value of the inventory cost. Table 2 provided summarises the values for the input
parameter used in the model. From now on these values of the parameters are going to be
used to gain insights about the solution methodology.

4.2 Solution approach used

For a hypothetical problem described in previous section the proposed model is optimised
to determine the optimal values of five decision variables i.e., the order quantity to
supplier 1 for determining the order up to quantity, when both of the suppliers are
available (q0′ ), the order quantity to supplier 2 for determining the order up to quantity,
when both of the suppliers are available (q0′′ ), the order quantity to supplier 1 for
determining the order up to quantity when only he is available (q1), the order quantity to
supplier 2 for determining the order up to quantity when only he is available (q2) and the
reorder point (r). A computer programming code of the model has been generated in
Matlab R2009a and two of the solution methods:
1 Nelder-Mead downhill simplex
2 genetic algorithm have been used to get the optimal values.
76 I. Ahmed et al.

4.2.1 Nelder-Mead downhill simplex

The Nelder-Mead algorithm is one of the best known algorithms for multidimensional
unconstrained optimisation which does not require any derivative information. The
algorithm is stated using the term simplex (a generalised triangle in N dimensions) and
finds the minimum of a function of N variables. It is effective and computationally
compact. Since, this method does not require any derivative information; therefore, it is
quite suitable for problems with non-smooth functions and in cases where determining
the gradient is computationally expensive. The objective function developed in this paper
is too complex to try for calculating gradient, so Nelder-Mead direct search method can
be a good choice for finding the optimal solution.

4.2.2 Genetic algorithm

GA is a search algorithm which is based on the mechanics of natural selection and
genetics to search through decision space for optimal solutions. The metaphor underlying
GAs is natural selection. In evolution, the problem that each species faces is to search for
beneficial adaptations to the complicated and changing environment. In other words, each
species has to change its chromosome combination to survive in the living world. In GA,
a string represents a set of decisions (chromosome combination), that is a potential
solution to a problem. Each string is evaluated on its performance with respect to the
fitness function (objective function). The ones with better performance (fitness value) are
more likely to survive. Then the genetic information is exchanged between strings by
crossover and perturbed by mutation. The result is a new generation with (usually) better
survival abilities. This process is repeated until the strings in the new generation are
identical, or certain termination conditions are met (Ahmed et al., 2014).

5 Result analysis

At first, the Nelder-Mead downhill simplex method is used to find the optimal values of
the decision variables which results in minimised AC for a given set of input parameters.
The numerical results obtained from three of the Nelder-Mead simplex runs are
summarised in Table 3. Although the Nelder-Mead method does not guarantee
convergence to the global optimal solution, but in this case it is apparent that the cost
values resulting from implementations with different initial points are close to each other.
In the Table 3 three of such implementations’ results are summarised and it is observed
that the results are more or less similar for the cost values and also for the decision
variables.
Table 3 Optimisation using Nelder-Mead downhill simplex method

q′0 q′′0 q1 q2 r Cost/unit time

0.760 0.777 9.288 11.932 1.174 56.282
0.780 0.725 9.534 11.940 1.092 56.291
0.766 0.759 9.227 11.778 1.14 56.278
 Development of an inventory model for two suppliers 77

So it can be concluded that as an optimisation technique Nelder-Mead algorithm inhibited

good convergence. And the Convergence paths of points in the domain in Nelder-Mead
method are shown in the Figure 3. From Figure 3 it can be observed that though the
initial parameters are set different and therefore the simplex of the Nelder-Mead graphs
start form a different domain but the destinations of the paths or the convergence points
are nearly same and found on the similar places of the graphs showed. So it can be
certainly concluded that the solutions might reach to global optimal value.

Figure 3 Convergence path of points in the domain in Nelder-Mead method (see online version
for colours)

16 13

14 12

12 11

10 10

8 9

6 8

4 7

2 6
0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1.1 0.4 0.5 0.6 0.7 0.8 0.9 1 1.1

10

9.5

8.5

7.5

6.5

6
0.4 0.45 0.5 0.55 0.6 0.65 0.7 0.75 0.8 0.85 0.9

Table 4 Optimisation using genetic algorithm

Cost/unit
G m q 0′ q0′′ q1 q2 r
time
100 0.01 0.774 0.736 9.142 11.077 1.242 56.300
500 0.01 0.747 0.754 9.02 11.636 1.116 56.295
500 0.05 0.761 0.783 9.116 11.25 1.197 56.290
78 I. Ahmed et al.

Figure 4 Minimisation of cost (best cost and population average) with number of generations in
GA (see online version for colours)
220
Best
200 Population average

180

160

140 Population average

cost

120

100

80 Best

60

40
0 10 20 30 40 50 60 70 80 90 100
generation

220
Best
200 Population average

180

160

140
cost

120

100

80 Population average

60
Best
40
0 50 100 150 200 250 300 350 400 450 500
generation

220
Best
200 Population average

180

160

140
cost

120

100
Population average
80
Best
60

40
0 50 100 150 200 250 300 350 400 450 500
generation

Moreover, to validate the effectiveness of the result obtained in this approach another
technique genetic algorithm approach is also used to have the optimal values of decision
variables that minimise the total cost of inventory model per unit time. It has been
observed that, the results are almost similar to the results of Nelder-Mead method. There
are three results summarised in Table 4 obtained using GA. Stall generation (G) and
mutation rate (m) have been changed to have better view of the result. The convergence
 Development of an inventory model for two suppliers 79

paths of points in the domain in GA are shown in Figure 4. From Figure 4 it has been
observed that for the first graph when stall generation or iteration was set to 100 the
convergence path was stepping decreased one. And the fine or smooth portion was not
reached quickly. On the contrary in the second and third graph when the stall generation
was set to 500 the fine or smoother convergent portion was attained earlier. So it can be
concluded that with the increase of stall generation or iteration the chance of having
optimal result can be ensured effectively. Besides, in the third graph when mutation rate
was increased that mean the variation of variable parameter can form in a large domain
then the path or results can drastically fall and go toward the convergent result very soon.
So increasing the mutation rate is also good for having the global optimal solution.

6 Sensitivity analysis

In order to study the effects of the model parameters, a sensitivity analysis is performed
with the illustrative example described in Section 4. In Table 5, level 1 is the basic level
with the parameter values which are used to solve the example in Section 4.1. Level 2
and 3 represent the values of these parameters at +20 and +40% of the basic level
respectively.
The optimum value of the decision variables and the corresponding values of the
objective function at different levels of the model parameters are shown in Table 6.
Case 1 shows the basic model results, and the all other cases show the results at levels 2
and 3 of each of the 11 model parameters given in Table 5. Thus, a total of 23 cases are
solved to study the sensitivity of model parameters as given in Table 6. The following
observations are made from the analysis.

Table 5 Experimental data set for sensitivity analysis

Parameter Basic (1) Level 2 (+20%) Level 3 (+40%)

h 5 6 7
k 10 12 14
π 250 300 350
π̂ 25 30 35
λ1 0.25 0.3 0.35
µ1 2.5 3 3.5
λ2 1 1.2 1.4
µ2 0.5 0.6 0.7
θ1 0.025 0.03 0.035
θ2 0.050 0.06 0.07
α 5 6 7
80 I. Ahmed et al.

Table 6 Results of sensitivity analysis

Case Parameter Level q 0′ q0′′ q1 q2 r Cost

1 Basic model 1 0.766 0.759 9.227 11.778 1.14 56.278
2 h 2 0.691 0.699 8.6529 11.03 0.909 62.427
3 h 3 0.648 0.659 8.102 10.408 0.753 68.138
4 k 2 0.807 0.895 9.768 12.380 1.095 59.352
5 k 3 0.872 0.890 10.693 13.187 0.971 62.097
6 π 2 0.731 0.777 9.097 11.345 1.469 57.750
7 π 3 0.747 0.769 9.275 11.629 1.682 58.978
8 π̂ 2 0.766 0.760 9.343 11.689 1.142 56.292
9 π̂ 3 0.767 0.763 9.350 11.578 1.161 56.309
10 λ1 2 0.742 0.761 8.983 11.280 1.444 57.059
11 λ1 3 0.756 0.744 8.960 11.130 1.670 57.626
12 µ1 2 0.749 0.758 9.124 11.596 0.788 53.705
13 µ1 3 0.755 0.749 9.010 11.490 0.568 51.873
14 λ2 2 0.744 0.753 8.767 11.111 1.106 52.985
15 λ2 3 0.731 0.740 8.469 10.662 1.071 50.366
16 µ2 2 0.746 0.761 9.784 12.114 0.963 57.311
17 µ2 3 0.757 0.765 10.040 12.334 0.838 58.182
18 θ1 2 0.759 0.754 9.257 11.907 1.16 56.557
19 θ1 3 0.748 0.782 9.112 11.998 1.212 56.842
20 θ2 2 0.766 0.754 9.317 11.897 1.14 56.359
21 θ2 3 0.757 0.759 9.380 12.085 1.15 56.442
22 α 2 0.709 0.712 11.147 14.142 1.383 67.489
23 α 3 0.669 0.667 13.081 16.852 1.644 79.866

Cases 2 and 3 reveals that if holding cost increases optimum reorder point and all the
order quantity decreases. It suggests that when holding cost is high it is not justified to
hold too much item as safety stock and it is beneficial to go for lower order quantity and
order more frequently. Final AC is highly sensitive to the increase of holding cost
(11% and 22% increase at 20% and 40% increase of holding cost). Cases 4 and 5
suggests that if ordering cost is high it will be sensible to order more at each ordering
time.
Cases 6, 7, 8 and 9 suggest that when the components of backorder cost are high one
should maintain a high reorder point to reduce the chance of backordering. Cases 10, 11,
14 and 15 suggests that when the duration of ON period is low which means suppliers are
not likely to available for a long period of time the value of order up to level q + r will be
 Development of an inventory model for two suppliers 81

high due to the increased value of r. Cases 12, 13, 16 and 17 reveals that when the
duration of OFF period is low which means suppliers are not likely to unavailable for a
long period of time reorder point should be low because the chance of finding all the
supplier in OFF state will be low. Cases 18, 19, 20 and 21 suggests that when chance of
supplier’s delivery quantity become smaller compared to the actual quantity ordered it
should be beneficial to order less from him and more from the other supplier. Cases 22
and 23 suggests that when the average rate of demand increases order quantity and
reorder point both increases to meet up the high demand. Also the AC value indicates that
it is too sensitive to the increase of rate of demand (19% and 41%) increase in two cases.
So undoubtedly, it is the most sensitive parameters among those used in the model.
For better understanding of the result two further sensitivity analyses on the effects of
λ1/μ1 and h / πˆ (Figures 5 and 6) on decision variables and AC is carried out. At first μ1 is
kept constant at its base value of 2.5 and λ1 is varied so that λ1/μ1 took the values of 0.1,
0.2…to 1. Then the problem is optimised for these new values of λ1. The new values of
λ1/μ1 are plotted on X-axis and the new values of AC, order quantity for supplier 1 (q1),
order quantity up to the level (q1 + r) and reorder point ® are plotted on Y-axis. From the
figure it is found that when the value of λ1 increases which means the average duration of
ON period is low, the order up to level (q1 + r) increases mainly due to increase of reorder
point at a fast rate. Here q1 decreases with increase of λ1 as q1 is smaller at high values of
λ1. Cost also increases with increase of λ1 but decreases after a certain point. Increase in r
and q1 + r is expected because reducing the average time supplier stays ON means a
larger probability of having shortages; hence one should keep the order up to levels and
reorder point at higher levels to avoid the shortages. Next the value of π̂ is kept at its
base level of 25 and holding cost h is increased gradually to see the effect of these on
other decision variables and final AC. From the figure it has been clear that the increase
in holding cost resulted in decrease of reorder quantity r and order up to level (q1 + r,
q2 + r) and order quantity for the supplier 1 and 2 (q1 and q2) and increase of cost. The
reason is when holding cost is higher than the backorder cost, to minimise the value of
total AC model chooses low value of order quantity and reorder point and hence low
order up to level quantity.

Figure 5 Effects of λ1/μ1 on the decision variables and AC (see online version for colours)
82 I. Ahmed et al.

Figure 6 Effects h / πˆ of on the decision variables and AC (see online version for colours)

7 Conclusions

Over the years traditional inventory models are used to be developed based on some
common assumptions. One of these assumptions is suppliers are always available to
receive manufacturers/retailers order whenever they needed. Another common
assumption is when available suppliers will always deliver the exact quantity as ordered.
But in reality these two assumptions can be seldom achieved. Suppliers can be
unavailable at random times and remain so for random length of time without any prior
notice. Even if they are available, they may not be able to deliver the ordered quantity
due to the randomness of their capacity. In the present paper, both of these assumptions
are relaxed and an order quantity/reorder point type inventory model is formulated for
two suppliers which will take into account both the possibility of supply disruption and
random capacity simultaneously. This research suggests that traditional assumptions that
had been customarily been made over the years during the formulation of inventory
model should be relaxed in order to take the model as close as possible to the real
scenario. Otherwise a huge cost will be incurred when real situation differ from assumed
one. So manufacturers/retailers should always be ready in advance of these unfavourable
situations and incorporate precautions in their inventory model which will minimise the
impacts of such situations. The author expects that in future some more assumptions of
the traditional inventory model will be relaxed and one day it will become just a
reflection of the real world scenario. Thus, it can be summarised that the methodology
developed in this paper is a step towards better addressing the situation around us through
joint consideration of random supply disruption and random capacity of suppliers.
There are some possible directions to which this research can be extended. In this
study suppliers’ ON and OFF period’s duration are assumed as exponentially distributed,
this assumption can be relaxed and model can be developed using semi-Markov chain.
The lead time that is said be to very small compared to the disruption period and
therefore assumed to be zero can be introduced to the model. The model can be extended
for multiple suppliers also. In this paper only supply disruption is addressed. However,
model can be developed to tackle the problem of supply and demand disruption for a two
echelon supply chain system for more than one member in each echelon.
 Development of an inventory model for two suppliers 83

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