SEMESTER 1 - 2023 - 2024

INVENTORY MANAGEMENT
MIDTERM REVIEW
Semester
SEM 1 – 2021 – 2022
1 2023-2024

Contents
INVENTORY MANAGEMENT................................................................................................................................................................................... 1
MIDTERM REVIEW ................................................................................................................................................................................................. 1
Semester 1 – 2021 – 2022 ..................................................................................................................................................................................... 1
Chapter 2: Order quantity when demand is approximately level ........................................................................................................................ 2
I. Basic Order quantity EOQ ....................................................................................................................................................................... 2
II. Quantity Discount .................................................................................................................................................................................. 3
Chapter 3: Lot sizing for individual items with time varying demand ................................................................................................................. 4
Chapter 4: Individual items with probabilistic demand....................................................................................................................................... 6
I. Notation .................................................................................................................................................................................................... 6
II. Procedure to find decision variables in given inventory policy .................................................................................................................... 7
III. Formulars to find some interested outputs: ........................................................................................................................................... 9
IV. Procedure to find random variable based on given distribution .............................................................................................................. 9
Chapter 2: Order quantity when demand is approximately level
I. Basic Order quantity EOQ
 II. Quantity Discount
Given quantity schedule as follows:

Order quantity Discounted price

1-299 $10.00
300-599 $9.75
600-999 $9.40
1000-4999 $9.50
5000 $9.00

Step 1: Find the optimal order Qi* for each discount level “i” by using the formula

Step 2: For each discount level “i” modify Qi* as follows

If Q* < qi, then Qi* = qi.

If qi  Q* < qi+1, then Qi* = Q*

If qi+1  Q*, eliminate this level from further consideration.

Step 3: Substitute the modified Qi* value in the total cost formula TC(Qi*).

Step 4: Select the Qi* that minimizes TC(Qi*)

Chapter 3: Lot sizing for individual items with time varying demand

Approach Method
Fixed order quantity Step1 : cumulate the requirement of period
(FOQ) Step2: Compare with EOQ, the nearest one to EOQ is the order replenishment quantity to the end of that period
2𝐴𝐷
𝐸𝑂𝑄 = √
𝑣𝑟

The economic order Step1: calculate the fixed optimal time supply:
quantity as time supply 𝐸𝑂𝑄 2𝐴
(POQ) 𝑇𝐸𝑂𝑄 = =√
𝐷𝑎𝑣𝑔 𝐷𝑎𝑣𝑔 𝑣𝑟
Round to the nearest integer that > 0
Step2: replenishment quantity must cover exactly the requirement of this integer number of periods 𝑅𝑜𝑢𝑛𝑑(𝑇𝐸𝑂𝑄 )

Wagner – Whitin Suppose 𝐹(𝑡) as the total cost of the best replenishment that satisfies demand requirement in period 1,2, … , 𝑡
method Then, 𝐹 (1) = ∑𝑐𝑜𝑠𝑡 𝑟𝑒𝑝𝑙𝑒𝑛𝑖𝑠ℎ𝑚𝑒𝑛𝑡 𝑎𝑡 𝐽𝑎𝑛.
There are t options (order at month 𝑖 = 1,2,3, … 𝑡
 Calculate ∑𝑐𝑜𝑠𝑡 𝑜𝑓 𝑜𝑝𝑡𝑖𝑜𝑛 𝑖 => the lowest one is 𝐹(𝑡)
Cách tính ∑𝑐𝑜𝑠𝑡
𝐸𝑥: 𝐹 ∗ (1), 𝐹 ∗ (2) are the min cost of replenishment that satisfies the demand requirement in period 1,2, … , 𝑡
𝐴 + (𝐷2 + 2𝐷3 )ℎ 𝑜𝑟𝑑𝑒𝑟 𝑎𝑡 1
𝐹 3 = min (𝐹 ∗ (1) + 𝐴 + 𝐷3 ℎ 𝑜𝑟𝑑𝑒𝑟 𝑎𝑡 2)
∗( )

𝐹 ∗ (2) + 𝐴 𝑜𝑟𝑑𝑒𝑟 𝑎𝑡 3
Silver – meal method Selects the replenishment quantity that arrives at the beginning of the 1st period and cover to the end of 𝑖 𝑡ℎ period
Let 𝑇𝑅𝐶(𝑖) be the total relevant costs associated with a replenishment (1 𝑡𝑜 𝑖)
𝑇𝑅𝐶𝑈𝑇(𝑖) be the total relevant costs per unit time
𝑆𝑒𝑡𝑢𝑝 𝑐𝑜𝑠𝑡 (𝐴) + ∑𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑡𝑜 𝑡ℎ𝑒 𝑒𝑛𝑑 𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑 𝑖 + 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑖𝑛𝑔 𝑐𝑜𝑠𝑡
𝑇𝑅𝐶 (𝑖 ) =
𝑖
Cách tính carrying cost:
Ex: 𝐷1 , 𝐷2 , 𝐷3 are the demand for month 1,2, we want to calculate the carrying cost of ordering 1,2,3 at 1
 𝐷2 ∗ ℎ ∗ (2 − 1) + 𝐷3 ∗ ℎ ∗ (3 − 1)
𝑇𝑅𝐶 (𝑖 )
𝑇𝑅𝐶𝑈𝑇 (𝑖 ) =
𝑖
Choose month 𝑖 in (1,2, … , 𝑇 − 1) that 𝑇𝑅𝐶𝑈𝑇 (𝑖 ) < 𝑇𝑅𝐶𝑈𝑇(𝑖 + 1) for the first time
Then, order quantity will be:
𝑖

𝑄 = ∑ 𝐷(𝑗)
𝑗=1
Least – Unit cost The same procedure as Silver – meal but considering the least cost per unit (not per period)
method (LUC) 𝑇𝑅𝐶 (𝑖 )
𝑇𝑅𝐶𝑈𝑇 (𝑖 ) = 𝑖
∑𝑗=1 𝐷(𝑗)
Part – period balancing Select the number of periods covered by the replenishment that ∑𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡𝑠 are made as close as 𝑠𝑒𝑡𝑢𝑝 𝑐𝑜𝑠𝑡 (𝐴)
(PPB) 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑎𝑡 𝑚𝑜𝑛𝑡ℎ 𝑖 + 1 = 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑎𝑡 𝑚𝑜𝑛𝑡ℎ 𝑖 − 1 + (𝑖 − 1)𝐷(𝑖 )𝑣𝑟
At period 𝑖 that 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 < 𝐴, the first replenishment will cover requirement to the month 𝑖
Dynamic programming
algorithm (network)
Chapter 4: Individual items with probabilistic demand
I. Notation
Notation Meaning (unit) Notation Meaning (unit)
𝐴 Ordering cost ($/order) 𝑝 Stockout/penalty cost ($/unit)
𝑟 Carrying cost ($/$/time) 𝑔(𝑥) Probability that demand during L
is equal x
𝑣 Unit cost ($/unit) 𝐺(𝑥) Probability that demand during L
is ≤ x
𝐷 Demand rate (units/time) 𝐿(𝑧) Special function of unit normal
distribution (table lookup), used
for finding 𝑛(𝑠) in case of normal
distribution
ℎ Holding cost ($/unit/time) 𝑛(𝑠) Expected number of stockouts
per cycle
𝑏 Back-order cost ($/unit) 𝑄 Order quantity
𝐿 Lead time (time) 𝑠 Reorder point
𝑙 𝑎𝑛𝑑 𝜎𝐿 Mean and variance of lead time 𝑆 Order up to level
distribution
𝜇 𝑎𝑛𝑑 𝜎 2 Mean and variance of demand 𝑅 Review interval
distribution during lead time or
time unit (if not having L)
𝛼 Service level (%)
𝛽 Fill rate (%)
 II. Procedure to find decision variables in given inventory policy
Inventory policy Type of policy Decision variables
Base stock Continuous Base stock 𝑠?
(𝑠, 𝑠 + 1) model review 𝑏
𝐺 (𝑠 ) =
𝑏+ℎ
From the given distribution, we can find the associated value of base stock level 𝒔
Note: When lead time is distributed with (𝑙, 𝜎𝐿2 ), then lead time demand std deviation becomes:
𝜎 = √𝑙𝜎 2 + 𝜇2 𝜎𝐿2 and base stock level becomes: 𝑠 + 1 = 𝑙𝜇 + 𝑧𝜎 = 𝜇 + 𝑧√𝑙𝜎 2 + 𝜇2 𝜎𝐿2
Order quantity – Continuous Order quantity 𝑄 and reorder point 𝑠?
Reorder point (𝑄, 𝑠) review 1. Given service level 𝜶
Type 1 given service 2𝐴𝐷
𝑄 = 𝐸𝑂𝑄 = √
level / fill rate ℎ
Find 𝑠: From given service level 𝐺 (𝑠) = 𝛼 and demand distribution => 𝑠

2. Given fill rate 𝜷

2𝐴𝐷
𝑄 = 𝐸𝑂𝑄 = √ ℎ
Find 𝑠
𝐸𝑂𝑄(1−𝛽)
step 1: calculate 𝐿(𝑧) = 𝜎
, then look up normal probability and partial expression to find 𝑧
step 2: 𝑠 = 𝜇 + 𝑧 ∗ 𝜎

Order quantity – Continuous Order quantity 𝑄 and reorder point 𝑠?

Reorder point (𝑄, 𝑠) review Method 1: Sequential solution procedure (Approximation)
Type 2 given
2𝐴𝐷
shortage cost 𝑄 = 𝐸𝑂𝑄 = √
ℎ
Find 𝑠:
𝑏
• in case of back-order cost consideration: 𝐺 (𝑠) = 𝑏+ℎ => 𝑧 => 𝑠 = 𝜇 + 𝑧𝜎
𝑝𝐷
• in case of shortage (stock out) cost consideration: 𝐺 (𝑠) = 𝑝𝐷+ℎ𝑄 => 𝑧 = > 𝑠 = 𝜇 + 𝑧𝜎
Method 2: Iterative solution procedure
Step 1: compute 𝑄 = 𝐸𝑂𝑄 (initial solution)
𝑄ℎ
Step 2: Substitute 𝑄 to 𝐺 (𝑠) = 1 − 𝑝𝐷 => Find out 𝑠 based on demand distribution
 ∞
Step 3: Use 𝑠 to compute 𝑛(𝑠) = ∫𝑠 (𝑥 − 𝑠)𝑔(𝑥)𝑑𝑥
𝑠−𝜇
• For normal distribution: 𝑛(𝑠) = 𝜎𝐿(𝑧) where 𝑧 = , 𝐿(𝑧) is obtained from looking up the
𝜎
normal probability distribution and partial expectations
1 𝑏
• For uniform distribution: 𝑛(𝑠) = 𝑏−𝑎 ∫𝑠 (𝑥 − 𝑠)𝑑𝑥
2𝐷[𝐴+𝑝𝑛(𝑠)]
Step 4: Solve for 𝑄 = √ ℎ
Step 5: Back to step 2 and continue until convergence (𝑠𝑖−1 = 𝑠𝑖 where 𝑖 is the current iteration)
Order up to level – Continuous Order up to level 𝑆 and reorder point 𝑠?
Reorder point (𝑆, 𝑠) review The procedure is as in (𝑄, 𝑠) model and set
𝑠 is the same value, 𝑆 = 𝑠 + 𝑄
Periodic review – Periodic review Order up to level 𝑆?
Order up to level Given review interval 𝑅
(𝑅, 𝑆) 𝑝−ℎ𝑅
Step 1: 𝐺(𝑆) = 𝑝 , then based on the demand distribution to find 𝑆
 III. Formulars to find some interested outputs:
Interested output (per time unit) Base stock model (approximation) (𝑄, 𝑠) model and (𝑆, 𝑠) model (𝑅, 𝑆) model
𝑠+𝑄
Expected back – order level 𝐵(𝑠) = 𝜇𝑝(𝑥) + (𝜇 − 𝑠)[1 − 𝐺 (𝑠)]
1
𝐵 (𝑄, 𝑠) = ∑ (𝑥 − 𝑠)𝑝(𝑥)
𝑄
𝑥=𝑠+1
Approximation
Expected service level 𝑆(𝑠) = 𝑃 (𝑥 < 𝑠) = 𝐺(𝑠) Approximation
𝑠+𝑄
1
𝑆(𝑄, 𝑠) = ∑ 𝐺 (𝑥 − 1)
𝑄
𝑥=𝑠+1
1
= 1 − [𝐵(𝑠) − 𝐵(𝑠 + 𝑄)]
𝑄
Expected inventory level 𝐼(𝑠) = 𝑠 − 𝜇 + 𝐵(𝑠) Approximation:
Where 𝜇 is mean demand per unit 𝑄+1
𝐼 (𝑄, 𝑠) = + 𝑠 − 𝐷𝐿 + 𝐵(𝑄, 𝑠)
time 2
Ordering cost per year 𝐷 𝐷 𝐴
∗𝐴 ∗𝐴
𝑄 𝑄 𝑅
Holding cost per year ℎ𝐼(𝑠) = ℎ[𝑠 − 𝜇 + 𝐵(𝑠)] 𝑄 𝐷𝑅
ℎ ∗ ( + 𝑠 − 𝐷𝐿) ℎ(𝑆 − 𝐷𝐿 − )
2 2
Purchasing cost per year 𝐷∗𝑣 𝐷∗𝑣 𝐷∗𝑣
Back-order cost per year 𝑏 ∗ 𝐵(𝑠)
Where 𝑏 is backorder cost per unit
Shortage cost per year 𝑘 ∗ 𝐵(𝑠) 𝑝𝐷𝑛(𝑠) 𝑝𝑛(𝑆)
Where 𝑘 is shortage cost per unit 𝑄 𝑅
Expected total cost per year Holding cost + ordering cost + purchasing cost + back-order or shortage cost
IV. Procedure to find random variable based on given distribution
 Continuous Random variable Mean Variance 𝑐𝑑𝑓 𝐺 (𝑥) 𝑥
Distribution
Normal 𝑥 𝜇 𝜎2 Not used, use Given service level 𝛼 => 𝑧𝛼
(It can be reorder standard normal
point, order distribution instead  𝑥 = 𝜎𝑧𝛼 + 𝜇
quantity,…)
1 1 𝑥
Exponential 𝐺 (𝑥) = 1 − 𝑒
−
𝜆 Given service level 𝐺(𝑥) = 𝛼
(Time between 𝜆 𝜆2
arrivals) (Time unit/units)  𝑥 = −(𝜆)log (1 − 𝛼)

Uniform 𝑎+𝑏 Given service level 𝐺(𝑥) = 𝛼

(𝑏 − 𝑎)2
distribution 2 √
( Demand is in the 12  𝑥 = 𝛼(𝑏 − 𝑎)
interval [𝑎, 𝑏])

For discrete distribution such as Discrete, Poisson, Geometric distribution, we must establish a table by spreadsheet (take much effort to
calculate by hand) as follow:

Variable 𝑝𝑑𝑓 𝑔(𝑥) 𝑐𝑑𝑓 𝐺(𝑥)

value 𝑥
Poisson
(Number of
occurrences
per time
unit)
Then, from the given 𝐺(𝑥) we can look up the table and find the interested value 𝑥

Source for more info about Probability and Distribution: https://openstax.org/books/introductory-business-statistics/pages/4-4-poisson-

distribution