Thomas Theorems

Outline:
1. Statement of the Dynamic Pricing Lot-Size Model.
2. Observation: Optimum need not exist (even with all assumptions from Thomas
[1] satisfied).
3. Thomas Lemmas 1 - 4 proved.
4. Dynamic programming formulation.
5. Planning Horizons: Thomas Lemma 5 and Theorems 1 - 2 proved.
6. Attempt of generalization.

Statement of the model

We consider a lot-size problem with dynamic pricing:

min

T
X

[ct xt + t st + It ht

pt t (pt )]

(1)

t=1

s.t.

It+1 = It + xt
x t t Mt ,
xt
0,
pt
0,
It
0,
t 2 {0, 1}.

t (pt ),

(2)
(3)
(4)
(5)
(6)
(7)

We assume that t 0 and pt t (pt ) attains a maximum for some pt in each period.
We further assume that ct 0, st 0 and ht 0.
As to the initial inventory level, it is convenient to assume that I1 = 0. If this is not
the case, complications may arise. Lemma 1 (It xt = 0) may not hold for the initial
period(s). For further remarks on this, refer to Wagner [2].

Feasibility (ok) and Optimality (no)

We begin with a statement of feasibility, which is obvious and may be skipped:

Feasibility: The problem (1) - (7) is feasible.
Proof: To obtain a feasible solution, choose an arbitrary demand (by picking certain
pt ), fulfil it entirely by production xt in the corresponding period, and do not store
anything. I.e., for each t, choose pt 2 Dom t . The demand t (pt ) is nonnegative
1

and we may set xt = t (pt ) and It+1 = 0. The setup indicator variable
to one for each period.

will be set

Optimality: The problem (1) - (7) is not guaranteed to possess an optimal solution.
Proof: Clearly, the problem cannot
from below. For, if pt t (pt )
PT be unbounded

attains its maximum for pt , then t=1 [ pt t (pt )] is a lower bound on the optimum.
It can however occur, that the optimum is not attained. Consider a single-period
program with zero initial inventory level I1 = 0:
min x1 + 0.5 t + 0h1

p1

1 (p1 )

(8)

s.t.
I2 = 0 + x1
0 x1 50 1 ,
p1
0,
I2
0,
1 2 {0, 1}.
And let

1 (p1 ),

(9)
(10)
(11)
(12)
(13)

be given as follows:
1 (p1 )

p1 + 3
.
(p1 + 1)2

The assumption of maximum is satisfied, since

p1

1 (p1 )

p1 (p1 + 3)
(p1 + 1)2

attains its maximum at p1 = 3, see Figure 2.

Figure 1: Graph of p1

1 (p1 ).

We analyse the possible solutions. If no production takes place( 1 = 0, x1 = 0,

p1 = 0), the value of objective is zero. If some production takes place, then 1 = 1
and we can substitute x1 = I2 + 1 (p1 ) from (9) to the objective, which becomes
min I2 +

1 (p1 )

+ 0.5
2

p1

1 (p1 ).

(14)

Figure 2: Graph of (1

p1 ) 1 (p1 ).

For an optimum, clearly I2 = 0 and we search for a minimiser of (1 p1 ) 1 (p1 ) (see

Figure 2).
This function is decreasing with limp1 !1 (1 p1 ) 1 (p1 ) = 1, so there is no optimizer.
The objective of the overall program tends to 0.5 as p1 goes to infinity, with x1
approaching zero (x1 = 1 (p1 )).

Lemmas 1 - 4

Lemma 1: If there exists an optimal solution to problem (1) - (7), there also exists
an optimal solution such that, for all t,
It xt = 0.

(15)

Remark: Compare this to the statement in Thomas [1], Lemma 1: There exists an optimal program
such that It xt = 0 for all t. The existence is not guaranteed, as shown in the previous section.
Was Thomas aware of this? What assumptions on t would guarantee the existence?

Lemma 1 states that for each period t one of the following options holds. Either
there is some inventory (It > 0) carried to that period, in which case no production
takes place (xt = 0), or the inventory is empty (It = 0) and production takes place
(xt 0).
Proof: Suppose that It > 0 and xt > 0 for some period t and the solution is optimal.
The amount It was produced during previous periods. We denote the preceding
periods in which production took place by W = {j | xj > 0, j 2 {1, . . . , t 1}}.
The cost qk of manufacturing an item in period k < t and keeping it in inventory
until period t is
qk = c k +

t
X

hj .

(16)

j=k+1

Since the solution is assumed to be optimal, all of It must have been produced in
one single period k 2 argmin{qk | k 2 W }. The total cost of producing It in period
k and xt in period t is
qk It + ct xt + st ,
(17)
3

P
where qk = ck + tj=k +1 hj . If qk > ct , then

qk It + ct xt + st > ct (It + xt ) + st ,

(18)

i.e. rescheduling the production of It from period k to period t gives a lower cost and
contradicts the optimality of the original solution. On the other hand, if qk ct ,
then
qk It + ct xt + st qk (It + xt ),
(19)
i.e. by rescheduling the production of xt to period k we obtain a new optimum. If
st > 0 in (19), the inequality is strict and we get a contradiction. If st = 0, equality
may hold, in which case the new optimum has the same value of objective, and
satisfies (15).
If zero setup costs were not allowed, Lemma 1 could be stated as If optimum exists,
it satisfies (15).
Lemma 2: If there exists an optimal solution to (1) - (7), there also exists an
optimal solution which satisfies for each t:
either xt = 0 or xt =

k
X

j (pj )

for some k

t.

(20)

j=t

Pk
Proof : Suppose xt > 0 and xt 6=
j=t j (pj ) for any k. Then either xt >
PT
j=t j (pj ), exceeding the production necessary to meet the total demand and contradicting optimality, or there exists k such that
k 1
X

j (pj )

< xt <

j=t

k
X

j (pj ).

(21)

j=t

By Lemma 1, we have It = 0, so that It+1 = xt

t (pt ). In each subsequent period,
the amount of j (pj ) is subtracted from the inventory, until in period k
0 < Ik <

k (pk ).

(22)

In period k, the inventory level Ik itself does not cover the demand k (pk ), so there
must also appear certain nonzero production xk > 0. This contradics Lemma 1.
Lemma 3 - Skipped, not necessary for further proofs.
Lemma 4: If Ik = 0 for some k, then it is optimal to consider the periods 1 through
k 1 by themselves. That is, the optimal decisions xj , Ij and pj for 1 j k are
also optimal to problem (1) - (7) with T = k 1.
Proof : Since Ik = 0, the constraints (2) involving Ik simplify to 0 = Ik 1 + xk 1
k 1 pk 1 and Ik+1 = xk
k pk . The whole model then splits into two decoupled
parts:
min

k
X1

[ct xt +

t st

+ It ht

pt t (pt )]

min

t=1

T
X
t=k

[ct xt +

t st

+ It ht

pt t (pt )]

(23)

s.t.
It+1 = It + xt
t (pt ) t 2 {1, . . . , k
0 = Ik 1 + xk 1
k 1 pk 1

xt

t Mt

t 2 {1, . . . , k

xt

t 2 {1, . . . , k

1}

It

t 2 {1, . . . , k

1}

{0, 1}

t 2 {1, . . . , k

2}
Ik+1
It+1

1}

xt

1}

= xk
k pk
= It + xt
t (pt ) t 2 {k + 1, . . . , T }

t Mt

t 2 {k, . . . , T }

xt

t 2 {k, . . . , T }

It

t 2 {k, . . . , T }

{0, 1}

t 2 {k, . . . , T }

The first part contains the variables xt , t , pt , It only for t 2 {1, . . . , k 1} and the
second part only for t 2 {k, . . . , T }. The overall optimum may therefore be obtained
by minimizing the two parts separately.

Dynamic programming formulation

A dynamic programming approach to (1) - (7) consists in solving it successively for

increasing values of T , starting from T = 1. Let F (t) denote the optimum for a
t-period program. Then
(
!
)
t
k
X
X
F (t) = min F (j 1) + sj +
cj +
hl pk
(24)
k (pk ) .
j,p

k=j

l=j+1

Lets denote the optimal j in (24) by j(t). It is the last optimal setup, the last
period j in the optimal solution for which xj > 0.
Let t1 < t2 be two periods and let
(
)
t2
t2
X
X
S(t1 , t2 ) = t ct +
hk ct1 +
hk , 1 t t2 .
k=t+1

k=t1 +1

To shorten the notation, we denote

cab = ca +

b
X

hl

l=a+1

with a b, and we have

n
o
S(t1 , t2 ) = t ctt2 ct1 t2 1 t t2 .

and t 2 S(t1 , t2 ) if and only if ctt2 ct1 t2 . Further, the following relation holds:
cas cbs ) cat cbt for each t

min{a, b}.

Finally, the dynamic formulation (24) can be restated as

(
t
X
F (t) = min F (j 1) + sj +
(cjk pk )
j,p

k=j

k (pk )

(25)

Planning Horizons

Lemma 5: Consider periods t t0 < t . If j(t0 ) = t , then j(t ) 2 S(t , t ).

The importance of the lemma relates to the dynamic programming approach. We
compute F (t0 ) and the last setup occurs for j(t0 ) = t . Next, we compute F (t )
for t > t0 . The lemma states that, in (25), it is enough to look for the optimal j
within the set S(t , t ) only.
Proof : Put j(t ) = y and suppose first that 1 y t0 . By the definition of t as
the optimal last setup for a t0 -period program, we have
0

F (t

1) + st +

t
X

(ct k

pk )

k (pk )

k=t

F (y

1) + sy +

t
X

(cyk

pk )

k (pk ).

(26)

k=y

Now, if y 2
/ S(t , t ), i.e. if ct t < cyt , then also
ct k < cyk
for each t0 < k < t . We may add these terms to (26) and obtain

F (t

1) + st +

t
X

(ct k

pk )

k (pk )

< F (y

1) + sy +

k=t

t
X

(cyk

pk )

k (pk ).

k=y

This contradicts the definition of y, so we must have y 2 S(t , t ).

Suppose now that t0 < y t . Put y = y1 and we have

F (t ) = F (y1

1) + sy1 +

t
X

(cy1 k

pk )

k (pk ).

k=y1

Further, we have
y1 1

F (y1

1) = F (y2

1) + sy2 +

(cy2 k

pk )

k (pk )

k=y2

for some y2 < y1 . Proceeding this way, we obtain a sequence of setup periods. In this
sequence, denote by A = yn the last setup period before period t0 and by B = yn+1
the setup period following A. We have B > t0 and
P 1
F (t ) = F (A 1) +sA + B
(cAk pk ) k (pk )+
Pk=A
yn+2 1
+sB + k=B (cBk pk ) k (pk )+

P
+sy1 + tk=y1 (cy1 k pk ) k (pk ).
Consider now the program with T = B. By Lemma 4 and by the previous part of
the proof, we know that A 2 S(t , B), that is, cAB ct B . It follows that cAt ct t
for t B, and in particular cAt ct t . If we assume that y1 2
/ S(t , t ), i.e.
ct t < cy1 t ,
6

we have that
cAt < cy1 t
and hence, by rescheduling the production from period y1 back to the period A, we
obtain a new optimum, a contradiction again.
Theorem 1 (Planning Horizons): Suppose that for a t0 period problem, the last
optimal setup j(t0 ) = y is such that cyt0 ctt0 for each 1 t t0 . Then in a t > t0
period program, a set-up will occur in the period j(t0 ) as well.
Proof : cyt0 ctt0 implies cyT ctT for periods T
t0 . If a set up occurs in period
yn > t0 , then either yn+1 = j(yn ) > t0 , or yn+1 t0 , in which case yn+1 = y by the
previous lemma. If yn+1 > t0 we repeat the argument (solving a yn+1 1 period
problem), until, for some n , we have yn +1 t0 .
Theorem 2 (Pricing): Still left to prove, but fairly obvious once the previous
results have been established.

Attempt of generalization

First observation: When introducing the marketing decisions into k , Lemma 4 is

spoiled - the equations dont get decoupled any more if It = 0 for some t. Lemma 4
is substantial to the proof of Lemma 5, of which Theorem 1 is a direct consequence.
Hence, the generalization will be nontrivial.

References
[1] J. Thomas. Price-production Decisions with Deterministic Demand. Management Science, 18(11):747750, 1970.
[2] Harvey M. Wagner, Thomson M. Whitin. Dynamic Version of the Economic
Lot Size Model. Stanford University and MIT, 1958.