Jrl Syst Sci & Complexity (2009) 22: 313323

FUZZY EPQ INVENTORY MODELS WITH

BACKORDER

Xiaobin WANG Wansheng TANG

Received: 16 November 2006 / Revised: 21 July 2008
c 2009 Springer Science + Business Media, LLC
Abstract This paper considers the economic production quantity (EPQ) problem with backorder
in which the setup cost, the holding cost and the backorder cost are characterized as fuzzy variables,
respectively. Following expected value criterion and chance constrained criterion, a fuzzy expected
value model (EVM) and a chance constrained programming (CCP) model are constructed. Then fuzzy
simulations are employed to estimate the expected value of fuzzy variable and level minimal average
cost. In order to solve the CCP model, a particle swarm optimization (PSO) algorithm based on the
fuzzy simulation is designed. Finally, the eectiveness of PSO algorithm based on the fuzzy simulation
is illustrated by a numerical example.
Key words Economic production quantity, fuzzy simulation, fuzzy variable, inventory, PSO.
1 Introduction
Inventory control is one of the main issues in logistic and supply chain management. Till
now, there have been thousands of related literature published in all kinds of magazines and
journals. Especially, the EPQ problem has attracted plenty of considerations. The EPQ prob-
lem considers an inventory-cum-production system in which procurement of inventory occurs
through production within the cycle itself. The objective of the problem is to decide how
many to produce and what time begins to produce. Similar to the classical EOQ formulae,
the classical EPQ formulae are obtained by dierential calculus (see [1]). But some researchers
presented the EOQ/EPQ formulae without referring to calculus methods (see [23]). In fact,
the methods in [23] are incorrect, and we can give the counterexample to illustrate it.
During last two decades, a great deal of research eorts have been devoted to variations of
the EPQ model for close-tting to real situations. For example, Rosenblatt and Lee
[4]
considered
the EPQ problem by assuming the production run with deteriorating processes, and studied
the eects of an imperfect production process on the optimal production run time. Balkhi
and Benkherouf
[5]
presented a method for nding the optimal replenishment schedule for the
production lot size model with deteriorating items, where demand and production are allowed
to vary with time in an arbitrary way and shortages are also allowed. Sana et al.
[6]
considered
the production lot size problem for a deterioration item with trended demand and shortages,
Xiaobin WANG
School of Computer and Information Engineering, Shandong University of Finance, Jinan 250014, China.
Email: wangxbzr@yahoo.com.cn.
Wansheng TANG
Institute of Systems Engineering, Tianjin University, Tianjin 300072, China. Email: tang@tju.edu.cn.

This research is supported by the National Natural Science Foundation of China under Grant No. 70471049.
314 XIAOBIN WANG WANSHENG TANG
then the optimal number of production cycles that minimized the average system cost was
determined.
In traditional EPQ problem, an assumption is that the parameters involved, such as the
setup cost, the holding cost, and the backorder cost are crisp values. However, in a real
production-inventory system, these cost parameters are not always xed, and they often have
some disturbances from one cycle to another. Typically, stochastic techniques and statistics
methods have been used to derive the probability distribution from the analysis of past data.
However, past data arent always available or reliable and their values arent enough to reect
the uctuation of the inventory related costs. In most cases, these costs are often estimated
based on the experiences and subjective judgments of the manager, and presented as linguistic
expressions, such as holding cost is likely between 20% and 40% of unit cost and setup
cost belongs to a interval with a membership degree. Thus, possibility theory rather than
probability theory is well suited to model these uncertain inventory problems. In fact, some
researchers, such as Lee and Yao
[7]
, Chang
[8]
, Lin and Yao
[9]
, and Hsieh
[10]
have studied the
EPQ problem without backorder in the fuzzy sense.
In this paper, the EPQ problem with backorder is explored in the fuzzy sense, where the
setup cost, the holding cost and the backorder cost are characterized as fuzzy variables, respec-
tively. As general extensions of the classical EPQ model, a fuzzy EVM and a fuzzy CCP model
are constructed, respectively. The remaining of this paper is organized as follows. In Section 2,
some preliminaries are introduced. In Section 3, the fuzzy EVM and the fuzzy CCP model are
presented, respectively, and fuzzy simulations are employed to estimate the expected value of
fuzzy variables and the level minimal average cost of the inventory system. In Section 4, a
PSO algorithm based on fuzzy simulation is designed. Section 5 provides a numerical example
to illustrate the eectiveness of the designed algorithm.
2 Preliminaries
Possibility theory was proposed by Zadeh
[11]
, and developed by many researchers such as
Dubois and Prade
[12]
and Yager
[13]
. Recently, B. Liu and Y. K. Liu
[14]
presented a new measure
named credibility measure. Moreover, Liu
[15]
proposed credibility theory.
Let be a nonempty set, P() the power set of , and Pos a possibility measure. Then
the triplet (, P(), Pos) is called a possibility space. Let A be an element in P(), then
the necessity measure of A can be represented by Nec{A} = 1 Pos{A
c
}, where A
c
is the
complement of A.
Denition 1
[14]
Let (, P(), Pos) be a possibility space, and A an element in P().
Then the credibility measure of A is dened by
Cr{A} =
1
2
(Pos{A} + Nec{A}) . (1)
Denition 2
[16]
A fuzzy variable is dened as a function from a possibility space (, P(),
Pos) to the set of real numbers.
In possibility theory, if measured with possibility and necessity, a fuzzy event A may fail
even though Pos{A} achieves 1, and hold even though Nec{A} is 0. That is to say, neither
possibility measure nor necessity measure has self-duality property. But measured with the
credibility in credibility theory, the fuzzy event A must hold if Cr{A} is 1 and fail if Cr{A} is
0. From this viewpoint, the credibility measure in credibility theory is a self-dual measure and
plays the role of probability measure in probability theory. In this section, only some necessary
FUZZY EPQ INVENTORY MODELS WITH BACKORDER 315
concepts and results will be introduced. For more details of credibility theory, the reader may
consult in [15,17].
Let be a fuzzy variable dened on (, P(), Pos). Then its membership function is derived
from the possibility measure by
(x) = Pos{

() = x}, x . (2)
Denition 3
[16]
A fuzzy variable is said to be nonnegative (or positive) if Pos{ < 0} =
0 (or Pos{ 0} = 0).
Denition 4
[14]
Let be a fuzzy variable on possibility space (, P(), Pos). Then the
expected value E[] is dened as
E[] =
_

0
Cr{ r}dr
_
0

Cr{ r}dr (3)

provided that at least one of the two integrals is nite. Especially, if is a positive fuzzy
variable, then E[] =
_

0
Cr{ r}dr.
Denition 5
[15]
The fuzzy variables
1
,
2
, ,
m
are said to be independent if and only if
Pos{
i
B
i
, i = 1, 2, , m} = min
1im
Pos{
i
B
i
} (4)
for any sets B
1
, B
2
, , B
m
of .
Denition 6
[15]
The fuzzy variables
1
,
2
, ,
m
are said to be identically distributed if
and only if
Pos{
i
B} = Pos{
j
B}, i, j = 1, 2, , m (5)
for any set B of .
Proposition 1
[18]
Let and be independent fuzzy variables with nite expected values.
Then for any numbers a and b, we have
E[a +b] = aE[] +bE[]. (6)
3 Model Formulation
Diering from the EOQ problem, the EPQ problem considers the inventory-cum-production
system in which procurement of inventory occurs through production within the cycle itself,
and the product is not manufactured instantaneously but with one certain rate. The purpose of
this section is to construct EPQ models in the fuzzy sense. For the sake of clarity, the notation
and assumptions are rstly stated as follows.
Notation
D demand rate per unit time;
P production rate per unit time (P > D);
B maximum backorder level;
Q economic production quantity;
c production cost per item;
h
i
unit holding cost per unit time in the ith cycle, i = 1, 2,
s
i
unit backorder cost per unit time in the ith cycle, i = 1, 2,
K
i
setup cost in the ith cycle, i = 1, 2,
316 XIAOBIN WANG WANSHENG TANG
T
i
length of the ith cycle, i = 1, 2,
I
max
maximum on-hand inventory level;
C
i
(Q, B) total cost in the ith cycle, i = 1, 2,
F
i
(Q, B) average cost in the ith cycle, i = 1, 2,
Assumptions
1) The backorder is allowable.
2) h
i
, s
i
and K
i
are dened on the possibility spaces (, P(), Pos), and they are independent
mutually.
3) h
i
, i = 1, 2, , are independent and identically distributed (iid) fuzzy variables. s
i
, i =
1, 2, , are iid fuzzy variables. And also K
i
, i = 1, 2, , are iid fuzzy variables.
Consider an inventory-cum-production system in which production rate and demand rate
are assumed to be deterministic constants, and the production rate is larger than the demand
rate for satisfying the continuous demand. The behavior of the inventory control and the
production process is shown in Figure 1.
I(t)
I
max
-B
o
P-D
D
T
h
T
s
Q/D
Time
Figure 1 The behavior of the inventory control and the production process
From Figure 1, it is easy to know that the largest inventory level I
max
can be expressed as
I
max
= Q
_
1
D
P
_
B, (7)
and the length of the ith cycle is
T
i
=
Q
D
, (8)
which includes the holding time T
h
and the backorder time T
s
, i.e., T
i
= T
h
+ T
s
. And also it
is clear that
I
max
B
=
T
h
T
s
. (9)
Hence,
T
h
=
I
max
B +I
max
T
i
, T
s
=
B
B +I
max
T
i
. (10)
In addition, the total cost C
i
(Q, B) in the ith cycle includes the setup cost K
i
, the production
cost cDT
i
, the holding cost
hiImaxT
h
2
and backorder cost
siBTs
2
. It follows from (7), (8), and
FUZZY EPQ INVENTORY MODELS WITH BACKORDER 317
(10) that C
i
(Q, B) can be expressed as
C
i
(Q, B) = K
i
+cDT
i
+
h
i
I
max
T
h
2
+
s
i
BT
s
2
= K
i
+cDT
i
+
h
i
I
2
max
2(I
max
+B)
T
i
+
s
i
B
2
2(I
max
+B)
T
i
= K
i
+cQ+
h
i
(QB)
2
2D
+
s
i
B
2
2D
, (11)
where = 1
D
P
. Then the average cost in the ith cycle can be expressed as
F
i
(Q, B) =
C
i
(Q, B)
T
i
=
K
i
D
Q
+
h
i
(QB)
2
2Q
+
s
i
B
2
2Q
+cD, (12)
where = 1
D
P
.
In fuzzy environments, the decision maker often needs to make decisions based on dierent
decision criteria, such as minimizing the expected average cost or minimizing critical average
cost with credibility condence level . In the sequel, following the above criteria, the fuzzy
expected value model and the fuzzy chance constrained programming model will be constructed,
respectively.
3.1 Fuzzy Expected Value EPQ Model
If the inventory system is assumed to operate in innite planning horizon, a natural idea
is to minimize the long-run expected average cost. Since h
i
, s
i
, and K
i
dened on possibility
spaces (, P(), Pos) are independent mutually, and h
i
, i = 1, 2, , are iid fuzzy variables,
and s
i
, i = 1, 2, , are iid fuzzy variables, and K
i
, i = 1, 2, , are iid fuzzy variables. Then
the fuzzy total costs in dierent cycles are independent, positive and also they have the same
membership function. In addition, the lengths of dierent cycles are identical. According to
the fuzzy renewal reward theorem (see [19]), we have
lim
t
E[the total cost in period t]
t
= E [F
1
(Q, B)] . (13)
Moreover, since fuzzy variables h
i
, s
i
, and K
i
are independent, it follows from Proposition 1
that
E [F
1
(Q, B)] =
E[K
1
]D
Q
+
E[h
1
](QB)
2
2Q
+
E[s
1
]B
2
2Q
+cD. (14)
If the decision maker wants to nd the optimal values of Q and B such that the long-run
expected average cost reaches its minimum, the expected value model can be constructed as
follows:
_

_
min
_
E[K
1
]D
Q
+
E[h
1
](QB)
2
2Q
+
E[s
1
]B
2
2Q
+cD
_
subject to :
Q > 0, B 0,
(15)
where = 1
D
P
.
318 XIAOBIN WANG WANSHENG TANG
The dierence between model (15) and the classical EPQ model is that the model (15)
includes the expected values of fuzzy variables. When these expected values are obtained, the
model (15) can be solved by employing optimization approaches. In fact, the objective function
in the model (15) can be written as E[F
1
(Q, B)] =
E[K1]D
Q
+
(E[h1]+E[s1])B
2
2Q
E[h
1
]B+
E[h1]Q
2
+
cD, where = 1
D
P
. And also it can be checked that the Hessian Matrix of E[F
1
(Q, B)] is
positive denite. According to the rst-order necessary conditions of optimality, the optimal
production quantity Q

is
Q

2(E[s
1
] +E[h
1
])E[K
1
]D
E[s
1
]E[h]
, (16)
and the optimal maximum backorder level B

is
B

2E[h
1
]E[K
1
]D
E[s
1
](E[s
1
] +E[h
1
])
. (17)
Moreover, the maximum on-hand inventory level I
max
is
I
max
= Q B =

2E[s
1
]E[K
1
]D
E[h
1
](E[s
1
] +E[h
1
])
, (18)
and the optimal long-run expected average cost is
E[F
1
(Q

, B

)] =

2E[s
1
]E[h
1
]E[K
1
]D
E[s
1
] +E[h
1
]
+cD. (19)
In the model (15), the cost parameters h
1
, s
1
, and K
1
can be positive and arbitrary fuzzy
variables. If h
1
, s
1
, and K
1
are triangular fuzzy variables or trapezoidal fuzzy variables, the
values of E[h
1
], E[s
1
] and E[K
1
] can be calculated easily by Denition 4. For other cases, such
as h
1
has a drum-shape or multimodal membership function, it is impossible to compute the
expected value by Denition 4. Accordingly, its expected value has to be estimated by applying
the fuzzy simulation. For the detail procedure about how to estimate the expected value of
fuzzy variables, the reader can consult in [14].
Remark 1 If the fuzzy variables h
1
, s
1
, and K
1
in the model (15) degenerate to crisp values
h, s, and K, respectively. Equations (16) and (17) change to
Q

=
_
2(s +h)KD
sh
and B

2hKD
s(s +h)
,
respectively. Correspondingly, Equations (18) and (19) change to
I
max
=

2sKD
h(s +h)
and F
1
(Q

, B

) =
_
2shKD
s +h
+cD,
respectively. These results implies that the classical EPQ model is only a spacial case of the
fuzzy EVM presented above.
FUZZY EPQ INVENTORY MODELS WITH BACKORDER 319
3.2 Fuzzy Chance Constrained Programming EPQ Model
In above-mentioned inventory system, frequently, the decision maker wants to control the
fuzzy average cost in each production cycle such that the critical value of the fuzzy average cost
is minimal with a predetermined credibility condence level and we call this value level
minimal average cost. Without loss of generality, the fuzzy average cost in the rst production
cycle is considered only. Then the problem can be modelled as the following fuzzy chance
constrained programming model:
_

_
min f
subject to :
Cr
_
K
1
D
Q
+
h
1
(QB)
2
2Q
+
s
1
B
2
2Q
+cD f
_
,
Q > 0, B 0,
(20)
where = 1
D
P
.
Similarly, in model (20), it needs to nd the appropriate vector (Q, B) such that f satises
the constrains and reaches its minimum value. For the xed values of (Q, B) and , the following
fuzzy simulation is designed to estimate f such that Cr{
K1D
Q
+
h1(QB)
2
2Q
+
s1B
2
2Q
+cD f} .
Step 1. Set f = +.
Step 2. Uniformly generate N sequences (
1k
,
2k
,
3k
) from such that Pos{
ik
} > , where
is a suciently small number, i = 1, 2, 3, k = 1, 2, , N, respectively. Thus, we can
obtain N real vectors (h
1
(
1k
), s
1
(
2k
), K
1
(
3k
)), k = 1, 2, , N.
Step 3. Calculate f
k
=
K1(
3k
)D
Q
+
h1(
1k
)(QB)
2
2Q
+
s1(
2k
)B
2
2Q
+cD for k = 1, 2, , N.
Step 4. Dene
L(r) = max
1kN
_
(x
k
)

f
k
r
_
+ min
1kN
_
1 (x
k
)

f
k
> r
_
as a function of r, where (x
k
) = min
_

h1
(h
1
(
1k
)) ,
s1
(s
1
(
2k
)),
K1
(K
1
(
3k
))
_
.
Step 5. Employ the bisection search to nd f such that f = min{r | L(r) }.
Step 6. Return f.
So far, we have constructed two EPQ models in the fuzzy sense, and known that the EVM
can be solved with generic approaches. However, the CCP model needs to be solved with
the heuristic algorithm owing to the complexity of the problem. There are several heuristic
algorithms inspired from the evolution of nature, such as Evolutionary Computation (EC)
techniques
[20]
, Genetic Algorithms (GA)
[21]
and PSO algorithm
[22]
. Here in order to solve the
CCP model, we choose PSO algorithm as the foundation to design an algorithm which integrates
fuzzy simulation and PSO algorithm, where the fuzzy simulation is employed to estimate the
level minimal average cost, and PSO algorithm is used to nd the optimal solution.
4 PSO Algorithm Based on the Fuzzy Simulation
PSO algorithm is a member of the wide category of swarm intelligence methods, which was
originally proposed by Kennedy and Eberhart
[22]
and introduced as an optimization method.
320 XIAOBIN WANG WANSHENG TANG
Till now, PSO algorithm has been successfully applied to a wide range of applications. The
comprehensive survey of PSO algorithm and its applications can be found in [23].
For depicting the procedure conveniently, we denote the objective function in the model (20)
by uncertain function U(Q, B), where Q and B are decision variables. Now, before starting the
PSO algorithm, we need to nd the value of tness function, i.e., the value of U(Q, B), which
needs to estimate with the fuzzy simulation presented above. Then the steps of the designed
algorithm can be summarized briey as follows.
Step 1. Initialization.
Set k = 1, and randomly generate an initial position (Q
k
i
, B
k
i
) from (0, M
1
] [0, M
2
] for
the particle i, where M
1
, M
2
are the upper boundaries of Q
k
i
and B
k
i
, respectively, i =
1, 2, , N, and N is the population size of the swarm. Then randomly sample a velocity
V
k
i
from [0, v] for the particle i, where v is the largest available velocity, i = 1, 2, , N.
Step 2. Update pbest and gbest.
Let P
k
i
= (P
k
iQ
, P
k
iB
) be a position of the particle i such that
U
_
P
k
iQ
, P
k
iB
_
= min
1lk
U
_
Q
l
i
, B
l
i
_
, (21)
where the values of U(Q
l
i
, B
l
i
), i = 1, 2, , N, can be calculated by the fuzzy simulation
designed in Section 3. We call P
k
i
the pbest of the particle i. Furthermore, let P
k
g
=
_
P
k
gQ
, P
k
gB
_
be a position such that
U
_
P
k
gQ
, P
k
gB
_
= min
1lk,1iN
U
_
Q
l
i
, B
l
i
_
. (22)
We call P
k
g
the gbest of all particles.
Step 3. Update velocity.
Set
V
k+1
iQ
= V
k
iQ
+c
1
r
1
_
P
k
iQ
Q
k
i
_
+c
2
r
2
_
P
k
gQ
Q
k
i
_
, (23)
and
V
k+1
iB
= V
k
iB
+c
1
r
1
_
P
k
iB
B
k
i
_
+c
2
r
2
_
P
k
gB
B
k
i
_
, (24)
where is inertia weight, c
1
and c
2
are acceleration constants, and r
1
and r
2
are two
random numbers in the interval [0, 1].
Step 4. Update position.
Set
Q
k+1
i
= Q
k
i
+V
k+1
iQ
and B
k+1
i
= B
k
i
+V
k+1
iB
. (25)
Step 5. Stopping criterion.
Set k k +1. If the number of iteration reaches the given maximum number, then stop
and return the value of the gbest as the optimal solution, otherwise go to Step 2.
5 A Numerical Example
In an inventory-cum-production system, production rate P = 80, production cost per item
c = 20, and demand rate D = 60. Other parameters are set as: h
i
is a drum-shape fuzzy
variable with membership function
FUZZY EPQ INVENTORY MODELS WITH BACKORDER 321

hi
(x) =
_

_
1 (x 5)
2
, if 4 x < 5,
1, if 5 x 6,
1 (x 6)
2
, if 6 < x 7,
0, otherwise.
(26)
s
i
= (10, 12, 15, 20) and K
i
= (95, 100, 105). If the decision maker wants to minimize the
long-run expected average cost, a fuzzy EVM can be constructed as follows,
_

_
min
_
60E[K
1
]
Q
+
E[h
1
](Q4B)
2
8Q
+
2E[s
1
]B
2
Q
+ 1200
_
subject to :
Q > 0, B 0.
(27)
By Denition 4, the values of E[s
1
] and E[K
1
] can be calculated as 14.25 and 100, respectively.
After 5000 cycles in the fuzzy simulation, the value of E[h
1
] can be estimated as 5.4973. Then
from (14), (16), and (17), the approximate optimal solution can be obtained as
(Q

, B

) = (110.000, 7.656)
with E[F(Q

, B

)] = 1309.091.
If the decision maker wants to control the fuzzy average cost in one production cycle such
that the critical value is minimal at the least credibility condence level = 0.9, a fuzzy CCP
model can be constructed as follows:
_

_
min f
subject to :
Cr
_
60K
1
Q
+
h
1
(Q4B)
2
8Q
+
2s
1
B
2
Q
+ 1200 f
_
0.9
Q > 0, B 0.
(28)
Solve this model by using the PSO algorithm based on the fuzzy simulation in which the
population size of swarm is 10, the largest velocity limit of each particle is 2, the inertia weight
= 1, and the acceleration constants c1 = c2 = 2. The upper boundaries of Q and B are
chosen as M
1
= 200 and M
2
= 100, respectively. After 5000 cycles in the fuzzy simulation and
1000 iterations in PSO, the approximate optimal solution and the level minimal average cost
are obtained as follows,
(Q

, B

) = (102.379, 6.823) and f = 1323.61.

The variation of level minimal average cost with the number of iterations N is shown in
Figure 2. It can be seen that the level minimal average cost tends to a steady value after
300 iterations of the algorithm.
6 Conclusions
The traditional EPQ model assumed that the cost parameters involved are constants. But
in a varied market, the constant cost assumption is invalid for the cost uctuations. In view
322 XIAOBIN WANG WANSHENG TANG
....................................................................................................................................................................................................................................................................................................................................................................................................................................................................................... . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
.......................................................................................................................................................................................................................................................... ......................
. ... . .. . . .. . . . . . . . . . . . .
1300
1325
1350
1375
1400
............................................................................................................................................................................................................................................................................................................................................................................................................................................................
200 400 600 800 1000
N
f
................ ...... ....... ................................... ................................ ............... ................ .............. ........ ........ .............................................................................................................. ........................................................................................................................................ ...................................................... ................................................................................................................................ ................................................................................ ...................................................................................................... ...................................................................................................... ...................................................................................................... ...................................................................................................... ...................................................................................................... ...................................................................................................... ...................................................................................................... ...................................................................................................... ...................................................................................................... ...................................................................................................... ...................................................................................................... ...................................................................................................... ...................................................................................................... ...................................................................................................... ..
Figure 2 The variation of level minimal average cost with the number of iterations N
of this fact, we have considered the EPQ inventory problems with backorder by characterizing
the setup cost, the holding cost and the backorder cost as fuzzy variables in this paper, and
constructed the fuzzy expected value model and fuzzy chance constrained programming model.
Applying the fuzzy simulation technique, we have estimated the expected values of fuzzy cost
parameters, and then solved the fuzzy expected value model with analytic methods. Whereas
the fuzzy chance constrained programming model is hard to solve with analytic methods, and we
have designed a PSO algorithm based on the fuzzy simulation to solve it. Finally, a numerical
example is presented to illustrate the good performance of the algorithm. Future research on
this problem could include additional sources of uncertainty in the model, such as random
or fuzzy demand rate, which might be analytically complex but an interesting avenue of the
research.
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