LOGO

Inventory control for multi-echelon system

Course of Inventory Management

Truong Ba Huy

ISE - Inventory Management

Characteristic

Items with Independent demand

Items with dependent demand

Truong Ba Huy

ISE - Inventory Management

Example 1: A Series Syste

Customer demand

External supply
Item 1

Item 2

Item N

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ISE - Inventory Management

Example 2: An Assembly Syste

External supply

1
Customer demand

4
2

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ISE - Inventory Management

Example 3: A Disassembly Syste

1
External
supply

6
4
7

Customer demand

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ISE - Inventory Management

Example 4: A Distribution Syste

3
1
External supply

Customer demand

Truong Ba Huy

ISE - Inventory Management

Other Example
Disassembly/assembly systems
Assembly/distribution systems
Distribution systems with transshipments
Distribution systems with multiple supply
sources

Truong Ba Huy

ISE - Inventory Management

Lot Sizing with

Multiple Echelons

Truong Ba Huy

ISE - Inventory Management

Example
Product 1

Product 2

Intermediate G
Feed A

Reactor

Reactor

Reactor

Intermediate E
Feed B

Intermediate F
Intermediate H

Reactor

Reactor
Feed C
9

Feed D

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ISE - Inventory Management

The Item-Task Network

Representation
End Product 1

End Product 2

Intermediate G
Feed A

Task
1

Task
2

Task
5

Task 2

Task 5

Intermediate E
Feed B
Intermediate F

Intermediate H

Task
4

Task
3
Feed C

10

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ISE - Inventory Management

Items & Tasks

An item can be a component purchased from an

outside supplier or produced internally.

An item can be a raw material (e.g., a component),

a semi-finished (e.g., sub-assembly) or a finished
product.

A task can consume and produce multiple items

(components/intermediates/products).

An item can be consumed by more than one task;

similarly, an item can be produced by more than
one task.

Truong Ba Huy

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ISE - Inventory Management

Example

Task
1

5
1

5
Task
2

Task
3

5
6

Task
4

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ISE - Inventory Management

System Description
t: a period (e.g., day, week, month); t = 1, ,T,
where T represents the planning horizon
Drt: demand for item r in period t (number of units),
r=1,, R where R is the number of items
ir: number of units of item r needed to carry out task
i, i=1,, N where N is the number of tasks
ir: number of units of item r produced by task i

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ISE - Inventory Management

Problem Statemen
Given a demand profile over a set of T periods
for each item (demand can be for either
finished or semi-finished products), determine
the quantity of each item to produce in each
period in order to minimize the production,
inventory and setup costs, while meeting
demand and without exceeding production
capacity.

Truong Ba Huy

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ISE - Inventory Management

Formulations
Big bucket formulation (the production
planning problem)
Small bucket formulation (the production
scheduling problem)

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ISE - Inventory Management

A Big-Bucket Formulatio
Tasks initiated in a period are completed during the
same period
The same task can be carried out multiple times during
a period
Items produced in a period can be used to satisfy
demand during that period
Demand in each period must be satisfied in that period;
no backorders allowed
There are no capacity limits (no limits on the number of
times a task can be carried out in a given period)

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ISE - Inventory Management

Notation
Parameters
cit: variable cost of carrying out task i in period t,
i=1,, N where N is the number of tasks
Ait: fixed cost of carrying out task i in period t
(incurred at most once during each period)
hrt: cost of holding one unit of item r in inventory
from period t to period t+1

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ISE - Inventory Management

Notation (Continued

Decision variables
Irt: inventory level of item r at the end of period t
Qit: the number of times task i is carried out in
period t
Yit = 1 if task i is initiated one or more times
during period i and Yit = 0 otherwise

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ISE - Inventory Management

Notation (Continued

Amount of item r produced in period t =

Amount of item r consumed in period t =

N
i 1

N
i 1

irQit

irQit

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ISE - Inventory Management

Formulation
Minimize

z t 1 i 1 cit Qit Ait Yit t 1 r 1 hrt I rt

T

subject to
I rt I r ,t 1 i 1 ir Qit i 1 ir Qit Drt , t , r
N

Qit MYit

i, t , r

Yit {0 ,1}
Qit , I rt 0

i, t
i, t , r

Truong Ba Huy

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ISE - Inventory Management

Formulation

Minimize

c Q
T

t 1

i 1

it

it

Ait Yit t 1 r 1 hrt I rt

T

subject to
I rt I r ,t 1 i 1 ir Qit i 1 ir Qit Drt , t , r
N

Qit MYit

i, t , r

Yit {0 ,1}
Qit , I rt 0
M is a large number

i, t
i, t , r

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ISE - Inventory Management

A Formulation with Capacity

Constraints and Multiple Machines
A machine may correspond to a single processor,
an assembly workstation, or a production line,
among others
It is possible for a task to be carried out on one or
more machines
A machine could possibly carry out more than one
task
A machine has a finite capacity and carrying out
any task consumes some of this capacity

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ISE - Inventory Management

Notation
Utm: capacity of machine m in period t; m = 1, ,
M, where M is the number of machines
im: units of capacity of machine m needed to
carry out task i
ci,t,m: variable cost of carrying out task i on
machine m in period t
Ai,t,m: fixed cost of carrying out task i on machine m
in period t

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ISE - Inventory Management

Note: A task that cannot be carried out on

a machine is assigned a very large
production cost.

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ISE - Inventory Management

Notation (Continued

Qi,t,m: the number of times task i is carried out in

period t on machine m

Yi,t,m = 1 if task i is initiated one or more times

during period i on machine m and Yi,t,m = 0
otherwise

Truong Ba Huy

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ISE - Inventory Management

Formulation
Minimize

c
T

t 1

i 1

m 1

i ,t , m

Qi ,t ,m Ai ,t ,mYi ,t ,m t 1 r 1 hrt I rt
T

subject to
I rt I r ,t 1 i 1 m 1 irQi ,t ,m i 1 m 1 irQi ,t ,m Drt , r , t
N

N
i 1

imQi ,t ,m U tm

t, m

U tmYi ,t ,m

im

i, t , m

Yi ,t ,m {0,1}

i, t , m

Qi ,t ,m

Qi ,t ,m , I rt 0

i , r , m, t

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ISE - Inventory Management

A Formulation with Setup Time

A setup time si,m is incurred if task i is carried out
on machine m, one or more times in any given
period.
The capacity constraint is modified as follows
N
t, m
i 1imQi ,t ,m simYi ,t ,m U tm

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ISE - Inventory Management

A Small-Bucket Formulatio
Time periods are chosen to be small enough so that
only one task on a particular machine can be either
initiated or completed
The processing time of each task consists of one or
more periods
A setup cost is incurred when the task initiated on a
machine is different from the task that was just
completed on that machine.

Truong Ba Huy

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ISE - Inventory Management

Notation
i,m: processing time (in number of time periods) of
task i on machine m

Qi,t,m = 1 if task i is initiated on machine m at time t,

and Qi,t.m = 0 otherwise

Zi,t,m = 1 if machine m at time t is set up for task i

Truong Ba Huy

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ISE - Inventory Management

Formulation
Minimize

m1 t 1 i 1 ci ,t ,mQi ,t ,m Ai ,t.mYi ,t ,m t 1 r 1 hrt I rt

M

subject to
I rt I r ,t 1 m 1 i 1 ir Qi .t i ,m ,m m 1 i 1 irQi ,t ,m Drt ,
M

Q
Z
i , m
u 1

i ,t u 1,m

i 1

i ,t , m

Z i ,t , m

Yi ,t ,m Z i ,t ,m Z i ,t 1,m

i , t , m
t , m
i , t , m

Qi ,t ,m & Z i ,t ,m {0,1}
I rt 0
0 Yi ,t ,m 1

i, t , m
r , t
i , t , m

r , t

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ISE - Inventory Management

Solution Methods
Small to medium problems can be solved exactly
(to optimality)
Large problems may not solve within a reasonable
amount of time (the problem belongs to a class of
combinatorial optimization problems called NPhard)
Large problems can be solved approximately
using a heuristic approach

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ISE - Inventory Management

Example Heuristic
Decompose the problem into a series of subproblems with smaller planning horizons
Decompose the problem into a series of
subproblems, each pertaining to a single item
Decompose the problem into one big bucket
problem (the production planning problem)
Solve the problem by relaxing one or more sets of
constraints
Solve the problem on a rolling horizon basis