Sujan Chandra

An inventory is an idle stock that is maintained

for the smooth running of a business.

An idle stock which will be used in future to

meet demand is inventory.

For example,

stock of raw materials stock of finished goods etc.

The inventory problem involves placing and receiving orders of given sizes periodically. From this stand point, an inventory policy answers two questions: 1.How much to order? 2.When to order?

To find the optimum order quantity or stock height which will minimize the total expected cost or maximize the total expected profit.

Procurement Cost Carrying Cost (or Holding Cost) Shortage Cost Other Costs

Procurement Costof placing an order Cost

Cost of setting up a production process

Dependent on the

Independent of the

quantity ordered Transportation cost Cost per unit procured Cost of inspection

quantity ordered Paper & postage costs Labour costs Cost of telephone call Cost to update accounting records
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Carrying Cost (or Holding Cost)

Its components are--- Costs of insurance, taxes Storage cost Cost of operating warehouse (such as light, night watchman ) Opportunity cost Obsolescence cost

Shortage Cost
When stock on hand is not sufficient to meet demand, shortage is encountered. Potential loss in income Cost of loss in customers goodwill

Shortage may be dealt with in two ways---i. Backlogged to a subsequent period ii. Lost sale case

Other Costs
Data acquisition and computation Cost for training the involved personnel Cost of making demand predictions Excess cost

Inventory Control Techniques

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ABC classification
Items on hand are classified into A, B, and C types on the basis of the value in terms of capital or annual money usage. A-type items with high value and low volume (15 %-20% of the number of items in inventory but about 60%70% of money usage) B-type items with moderate value and moderate volumes C-type items with low value and high volume (60% of the number of items but only about 10% of money usage)

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FSN Classification
Items are classified according to the rate of consumption. The materials can be fast (F), slow (S) and non-moving types (N). For example, F = Rice, pulse, salt, sugar, tea are consumed almost daily at relatively faster rate S = Fruit, dry fruits are consumed at a moderate speed N = Medicine, shaving blades, wound plasters are consumed at a very negligible rate

For their control and procurement F-type materials get the maximum attention N-type materials get the minimum attention
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VED Classification
Items are classified according to its criticality in the production system. The items can be vital (V), essential (E) and desirable (D) types. For example, V Much attention is given to the vital items E Moderate attention is given to essential items D Less attention is given to desirable items Because the lack of vital items can bring the production of the plant down and the plant will run into loss.

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Deterministic Models
Demand of an item is known and fixed. Types of Inventory Models under the deterministic situation

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Probabilistic Models
Probabilistic inventory models apply when the product demand is not known but can be specified by means of a probability distribution. Probabilistic models are categorized under

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Different Ordering Systems

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Dynamic Deterministic Model with No Lead Time (EOQ Model)

Assumptions Demand occurs at the uniform rate. Ordering and holding costs are constant over time. The whole quantity is delivered at the same time. No shortages are allowed.

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Inventory level over time

Q/

Average inventory

Time Q/d
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Notations:h = Holding cost per unit and time unit A = Ordering or setup cost d = Demand per time unit Q = Quantity ordered C = Costs per time unit

Q d C( ) = h + A Q 2 Q

The optimum value of order quantity is determined by minimizing C w.r.t. Q.

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Solving for Q we obtain the economic order quantity

2Ad Q = h
*

Then,

m in C (Q )=C (Q= ) Adh 2

*

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Multi-item EOQ with Storage Limitation

Model deals with n (>1) items Items are competing for a limited storage

space No shortages are allowed

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Notations:For item i, i=1,2.,.,n hi = Holding cost per unit and time unit Ai = Ordering or setup cost di = Demand per time unit Qi = Quantity ordered ai= Storage area requirement per inventory unit M=Maximum available storage area for all n items
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The mathematical model representing the inventory situation

Min C( Q , Q2 ,...., Q )= 1 n
i =1

Ai di hi Qi ( + ) Qi 2

subject to,

aQ
i =1 i

Qi > 0, = 1,2,...., i n

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The unconstrained solution is

Qi =
*

2 Ad i i , i=1,2,....,n hi
is the optimum

* If this solution satisfies the constraint,Qi then solution.

The problem can be solved directly by using non linear programming.

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Model with Backorders

Demands occurring when the system is out of stock is

backordered until a procurement arrives.

All backorders are met before the procurement can be

used to meet any other demands.

Cost of backorder=

where is the fixed + t & is proportional to the cost length of time for which backorder exists.

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Inventory level over time

Q-s

T2 T1 s T
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Time

Inventory carrying cost per cycle h ( t Q s ) dt 0 area=

T1

=
T1

h ( s) Q 2

Backorder cost per cycle=

s tdt +
0

s 2 = + s 2
Average annual cost then becomes

C=

1 1 1 A+ h (Q s ) 2+ ( + 2) s s Q 2Q Q 2

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Thus s* , the optimal value of s, is

1 s = { + h
*

[2 Ah + (1

h + ) ( ] 1/} ) 2 2

Thus Q* , the optimal value of Q, is

+ h 1/2 2 A ( )2 1/2 * Q =( ) [ ] h h( + h)

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Directions for future research

A DETERMINISTIC INVENTORY MODEL WITH PERMISSIBLE DELAY IN PAYMENT AND PRICE DISCOUNT ON BACKORDERS

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In classical inventory models with shortages, generally assumed that the unmet demand is either completely lost or completely backlogged. In case of many products of famous brands or fashionable commodities customers prefer their demands to be backordered.

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PRICE DISCOUNT ON BACKORDERS Inventory manager may offer a price discount on the stock-out item to each customer who is ready to wait till fulfillment of his demand in order to secure more backorders.

PERMISSIBLE DELAY IN PAYMENT Supplier allows the inventory manager a certain fixed period of time to settle his accounts. No interest is charged during this period, but beyond it the manager has to pay an interest to the supplier.

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Possible direction for future research Deterministic inventory model Shortages are allowed Only a fraction of the unmet demand is backlogged Inventory manager offers price discount on it Conditions of permissible delay in payments are also taken into account.

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As regards the permissible delay in payment, there can be two possibilities as follows:S 0 M T1 T

Case 1: M T1

0 Case 2: M T1

T1

M T

s
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Methodology
Formulate the cost function including inventory carrying cost, ordering cost, backorder cost, lost sale cost. Find out the optimum ordering policy and the optimum discount offered for each backorder by minimizing the total cost in a replenishment interval. Numerical examples to illustrate the model.

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References:Aggarwal, S.P. and Jaggi, C.K. (1995): Ordering Policies of Deteriorating Items under Conditions of Permissible Delay in Payments, Journal of Operational research Society, 46, 658-662. Chung, K.J. and Huang, C.K. (1998): Economic manufacturing quantity model involving lead time and setup cost reduction investment as decision variables, International Journal of Operations and Quantitative Management, 4, 209216. Dan and Hsian (2001): Inventory models with backorder discounts and variable lead time, International Journal of System Science, 32(7), 925-929. Pal, M. and Ghosh, S.K. (2006): An inventory model with shortage and quantity dependent permissible delay in payment, Australian Society of Operations Research Bulletin, 25(3), 2-8. Goyal, S.K. (1985): Economic Order Quantity under Conditions of Permissible Delay in Payments, Journal of Operational research Society, 36, (1985) 335-338. Hwang, H. and Shinn, S.W. (1997): Retailers Pricing and Lot Sizing Policy for Exponentially Deteriorating Product Under Condition of Permissible Delay in Payments, Computer & Operations Research, 24, 539-547.
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Hwang, H. and Shinn, S.W. (1997): Retailers Pricing and Lot Sizing Policy for Exponentially Deteriorating Product Under Condition of Permissible Delay in Payments, Computer & Operations Research, 24, 539-547. Jamal, A.M., Sarker, B.R. and Wang, S. (1997): An Ordering Policy for Deteriorating Items with Allowable Shortage and Permissible Delay in Payment, Journal of Operational research Society, 48, 826-833. Kim, K.L., Hayya, J.C. and Hong, J.D. (1992): Setup cost reduction in economic production quantity model, Decision Sciences, 23, 500-508. Lee, W.C., Wu, J.W. and Lei, C.L. (2007): Optimal inventory policy involving back-order discounts and variable lead time demand, International Journal of Advanced Manufacturing Technology, 34(9-10), 958967. Ouyang, L., Cheng, C. and Chang, H. (1999): Lead time and ordering cost reductions in continuous review inventory systems with partial backorders, Journal of the Operational Research Society, 50, 12721279.
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THANK YOU

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