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A Simple Inventory Replenishment Decision Rule for a Linear Trend in Demand Author(s): Edward A.

Silver Source: The Journal of the Operational Research Society, Vol. 30, No. 1 (Jan., 1979), pp. 71-75 Published by: Palgrave Macmillan Journals on behalf of the Operational Research Society Stable URL: http://www.jstor.org/stable/3009668 . Accessed: 29/06/2011 03:17
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J. Opl Res. Soc. V'ol.30, 1, pp. 71-75 Perganton Press Ltd 1979. Printed in Great Britain C Operational Research Society Ltd

0030-3623/79/0101-0071802.00/0

A Simple Inventory Replenishment Decision Rule for a Linear Trend in Demand


EDWARD A. SILVER
Department of Management Sciences, University of Waterloo, Waterloo, Ontario, Canada We consider the situation of a deterministic demand pattern having a linear trend. The problem is to select the timing and sizes of replenishments so as to keep the total of replenishment and carrying costs as low as possible. An earlier developed heuristic for the general case of a deterministic, time-varying, demand pattern is specialized to the case of a linear trend. The simple decision rule is shown to lead to small cost penalties in two examples that have been exactly analyzed in an earlier article in this journal.

INTRODUCTION WE CONSIDER the situation of an item having a deterministic demand pattern with a linear trend. Shortages are not permitted. The problem facing the decision-maker is the selection of the timing and sizes of replenishments so as to reduce the total of replenishment and carrying costs to as low a level as possible. This problem has recently been treated by Donaldson' for the case of a positive trend and a well-defined termination point (horizon) of the demand pattern. He uses calculus considerations to establish a key property of the optimal replenishment pattern, namely that "the quantity ordered at a replishment point, i.e. a point at which actual inventory becomes zero, should be the product of the current instantaneous demand rate and the elapsed time since the last replenishment". Donaldson then used this property to determine, for a given demand pattern and horizon length, the best locations in time of a given number of replenishments. The computational effort is not simple; tabular aids are developed but interpolation is needed. Introducing the cost parameters (fixed set-up cost per replenishment and the unit inventory carrying cost) one can then establish the appropriate number of replenishments to use for the given demand pattern and horizon length. Earlier, Diegel,2 in an unpublished document, used essentially the same approach and developed rather extensive tabular results. In the current paper we consider an approximate solution procedure, known as the Silver-Meal3 heuristic, which was developed for the general case of a deterministic, time-varying demand pattern. We take the special case of a positive linear trend, which gives a very simple decision rule. Its use is illustrated with two numerical examples from Donaldson's article. THE SILVER-MEAL HEURISTIC

(a) General case


The development of the heuristic was motivated by difficulties in the implementation of the optimal solution to the discrete time version of the problem under consideration, namely the Wagner-Whitin4 dynamic programming algorithm for the selection of lot sizes under a time-varying demand pattern. Dynamic programming is difficult for the practitioner to comprehend. The computational effort is substantial and at the time

of a replenishment, the algorithm often requires demand information all the way to a distant horizon. It computes all replenishments needed out to that horizon, where, in fact, the over-riding consideration is really to firm up the size of only the first replenishment and with as little dependence as possible on demand forecasts well into the 71

Journal of the Operational Research Society Vol. 30, No. 1 future. (These concerns, particularly the latter two, also apply to the solution methods suggested by Diegel and Donaldson.) The heuristic surmounts these difficulties by establishing the size of only the first replenishment in a forward-looking fashion so that usually demand information for only a few periods in the immediate future is needed. This is accomplished by the use of a surrogate criterion. Instead of selecting the first replenishment and all others so as to minimize the total relevant costs out to the horizon, we choose the size of the first replenishment to minimize costs per unit time over the duration of only this first replenishment. The criterion is appealing but is certainly suboptimal, particularly when there is a well-defined ending point in the demand pattern in the not too distant future. HQwever, as Donaldson states "In practice demand will not usually cease at the horizon, the solution (i.e., his method) will be sub-optimal, and the procedure would be to review the situation and calculate new tie's(times of replenishments) at some point before the horizon is reached". Moreover, a number of tests have been conducted for both the continuous time and discrete time5 versions of the heuristic and these have demonstrated that the penalties (in set-up plus carrying costs) in using the heuristic are very low. In the case of discrete time, replenishments are restricted to the beginnings of discrete intervals, e.g. once a week. In these circumstances it turns out (see Silver and Meal5 or Peterson and Silver6) that the heuristic is even simpler to use. Before writing the criterion function is is necessary to introduce some notation. It is assumed that at time t = 0, the inventory is at the 0 level and a replenishment is necessary at that moment. It is convenient, as Donaldson has noted, to let the duration of the replenishment (rather than its size) be the decision variable. Therefore, let T be the duration of first replenishment, in periods (Donaldson denotes this variable
by t1)

f(t) be the demand rate at time t c1 be the fixed cost of replenishment per lot, in ? c2 be the cost of holding inventory, in ?/unit per period M cl
C2

and TRCUT(T) be the total relevant costs per unit time, in ?/period. Then, we wish to select the T value so as to minimize TRCUT(T) A necessary condition is that dTRCUT(T) = 0, dT which leads to
rT

cl + c2 ftf(t)dt T(1

T2f(T) (b) Special case of a linear trend Here we have

tf(t)dt = M.

(2)

f(t) = a + bt, where a is the demand rate at time 0, and b is the trend value. Substituting (2) into (3) we obtain
T2(2
?

(3)

3bT)

M,

(4)

i.e. a cubic equation in T. 72

E. A. Silver-Linear Trend in Demand


For the case of positive (b > 0) trend (the only case really treated by Donaldson) (4) can be effectively solved by iteration, viz. letting T(k) be the value of T obtained on the kth iteration (4) can be rewritten as
Tk ? V''I La/22bT k)/31

5 (5)

and one can initially set T(?) = 0. Normally only a few iterations are required for convergence. In addition, for the case of b > 0 the second derivative of (1) shows that the solution of (4) is a minimizing value of T. Where a = 0, (5) should not be used but (4) gives a closed form solution for T, T
=

(3M/2b)"3.

(6)

The case of a negative (b < 0) trend is more complicated to analyze. In particular, the minimizing value of T can occur at the boundary value (-a/b) where the demand rate goes to zero.7

COMPARISON

USING

DONALDSON'S

EXAMPLES

The specific problem treated by Donaldson is the selection of the number, n, of orders and their timing, denoted by to = 0, t1, t2, ..., tn-1, so as to minimize the total of set-up plus inventory carrying costs over a horizon of length T subject to initial and final inventory both being set to 0. His cost expression (we have omitted the cost of the material itself, a fixed component independent of the number of orders and their timing) is
H
n-1

W = nc1 +

rti+

c2

tf (t)dt - c2
o

ti

f
ti

(t)dt.

~~~i=o

We normalize, by dividing by c2, to obtain the normalized time H, namely


H n-1 ti+1

total relevant costs over

W=

nM +

tf(t) dt -

A ti J
i=O

f(t) dt.
t

(7)

For the case of a linear trend in demand substitution W'

of (3) into (7) leads to

=nM +

2 3 2~ + 3~ Z -(t?, W'=nM? aH2 ?H3 -2ttti+i- ti(ti+


-

-ti)

La

tiLa

?2t

-8 ter+t)

t.

(8)

It is emphasized that this equation holds for arbitrary, not just optimal, values of the ti's, hence can be used to cost out the performance of the heuristic. Example 1 (Donaldson')

Cl/C2

4.5,a = 0,b = 900,H

1.

The first replenishment must be placed at time 0. Using the heuristic, we utilize (6) (because at time 0, a = 0). Thus t = T=

0.20. occurs at time At that moment

t9. We now know that the second replenishment

the demand rate is given by a


=

0 ? bt,

900(0.20) = 180. 73

Journal of the Operational Research Society Vol. 30, No. 1 Now, (5) gives

L90 +

600T(k

1)

Starting with T(0) = 0 the successive iterations produce k


T(k)

0
0

3 4 1 2 0.22 0.14 0.16 0.16

Hence T2 = 0.16 and t2 = t1 + T2 = 0.36. Slightly faster convergence occurs by setting T(?) equal to the T value found for the previous replenishment, here 0.20. Continuing in this fashion we ascertain the following pattern of eight replenishments: 7 0 1 2 4 5 6 3 0 0.20 0.36 0.50 0.62 0.73 0.84 0.94 tj T 0.20 0.16 0.14 0.12 0.11 0.11 0.10 0.06 i The heuristic would actually choose T = 0.10 on the last replenishment. The boundary at H = 1 forces a last cycle shorter than desired. Using (8) we find
W' = 63.30.

Donaldson's solution is to use only seven replenishments with the following timing: 6 2 4 5 1 3 0 0 0.23 0.40 0.54 0.67 0.79 0.90 tj i Equation (8) gives a normalized total relevant cost of
W' = 64.20,

a cost which is actually 1.4% higher than that obtained by the heuristic! The reason for this bizarre behaviour is that Donaldson's ti's, shown to only two significant figures, are not exactly optimal. However, even when we found the ti's to an accuracy of five figures (using Diegel's tables2), the optimal cost was
W' = 62.85

and the heuristic is seen to incur a cost penalty of only 0.7%, despite the detrimental effect of the (likely arbitrary) demand termination point at the horizon of H = 1. Example 2 (Donaldson')
M
=

C,/c2 = 90,a = 6,b = 1,H = 11.

Straightforward use of the heuristic quickly leads to the following schedule of four replenishments: i tj T 1 2 0 3 0 3.99 7.49 10.68 3.99 3.50 3.19 0.32

Here the boundary at H = 11 has a severe effect. If the linear trend pattern continued beyond time 11, the T value of the fourth replenishment would be 2.95, not just 0.32. Equation (8) gives a normalized total relevant cost of
W'=

584.72.

74

E. A. Silver-Linear Donaldson's exact solution is as follows: ti and the optimal cost is from (8) i G 0 1 4.2

Trend in Demand

2 7.8

W' = 498.83. The unadjusted heuristic solution is seen to produce a sizeable cost penalty, of the order of 17%. However, this is caused by the (likely artificial) demand termination point occurring very shortly after the time of the last replenishment determined by the heuristic. If the demand pattern did indeed terminate at time 11, an obvious simple modification of the heuristic would be to slightly increase the time coverage of the third replenishment (from T = 3.19 to T = 3.51) so that it would satisfy demand right up to the horizon. With this modification the cost of the heuristic solution is reduced to 511.96, which is only 2.6% above the optimal value of 498.83. SUMMARY In this paper we have shown how the Silver-Meal heuristic produces a very simple decision rule for the case of a linear trend demand. Cost penalties of using the unadjusted heuristic are likely to be very small except where the demand termination point happens to lie just after the depletion point of a replenishment. Two arguments minimize the impact of this effect. First, the demand termination point is often an artificial device needed to obtain the optimal solution. Second, where it is not, a proposed simple modification of the heuristic should bring the cost penalty down to a sufficiently low value.
ACKNOWLEDGEMENTS The author wishes to thank Professor Adolph Diegel for making a copy of his thesis available several years ago, and Professor Michael Magazine for his constructive comments on a draft version of this paper. The research leading to this paper was supported by the National Research Council of Canada under Grant No. 7417. REFERENCES
1 W. A. DONALDSON (1977) Inventory replenishment policy for a linear trend in demand-an analytical solution.

Opl Res. Q. 28, 663-670. 2A. DIEGEL (1962) Economic lots under linearly changing consumption: with tables. Unpublished DBA thesis, School of Business Administration, University of Oregon, Portland. (Diegel's current address: Universite de Quebec a Chicoutimi, 930 est rue Jacques-Cartier, Chicoutimi, Quebec, Canada). 3E. A. SILVER and H. C. MEAL (1969) A simple modification of the EOQ for the case of a varying demand rate. Prod. Invent. Mgmt 10, 52-65. 4H. M. WAGNER and T. M. WHITIN (1958) Dynamic version of the economic lot size model. Mgint Sci. 5, 89-96. 5E. A. SILVER and H. C. MEAL (1973) A heuristic for selecting lot size quantities for the case of a deterministic time-varying demand rate and discrete opportunities for replenishment. Prod. Invent. Mgrnt, 14, 64-74. 6R. PETERSON and E. A. SILVER (1979) Decision Systems for. Inventory Management and Production Planning. Chapter 8. John Wiley & Sons, New York. 7E. A. SILVER (1978) A lot-sizing heuristic for the case of a linearly decreasing demand pattern. Working Paper No. 123, Department of Management Sciences, University of Waterloo, Waterloo, Ontario. 8A. DIEGEL (1966) A linear approach to the dynamic inventory problem. Mgmt Sci. 12, 530-540.

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