International Journal of Systems Science

ISSN: 0020-7721 (Print) 1464-5319 (Online) Journal homepage: http://www.tandfonline.com/loi/tsys20

Heuristic models for deteriorating items with

shortages and time-varying demand and costs

B. C. GIRI & K. S. CHAUDHURI

To cite this article: B. C. GIRI & K. S. CHAUDHURI (1997) Heuristic models for deteriorating
items with shortages and time-varying demand and costs, International Journal of Systems
Science, 28:2, 153-159, DOI: 10.1080/00207729708929374

To link to this article: http://dx.doi.org/10.1080/00207729708929374

Published online: 06 Apr 2007.

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International Journal of Systems Science, 1997, volume 28, number 2, pages 153-159

Heuristic models for deteriorating items with shortages and

time-varying demand and costs

B. C. GIRlt and K. S. CHAUDHURlt

In this article, we develop and analyse two heuristic models for the inventory
replenishment problem in which the demand rate, deterioration rate, ordering cost,
holding cost and shortage cost are all assumed to vary with time. Shortages in inventory
are allowed and are completely backlogged. Our objective is to determine the optimal
replenishment policy of the inventory system whether or not a finite planning horizon
exists. Both the heuristic models are illustrated with the help of a numerical example.
Finally, the sensitivity analysis is also presented for the heuristic rule that outperforms
the other one.

I. Introduction The non-dynamic counterpart with shortages was

The problem of determining the economic replenishment
policy for an inventory item having time-varying demand
pattern over a finite planning horizon has engaged the
attention of a number of researchers over the past
decade. The analytical solution to this problem was given
first by Donaldson (1977) and was easier to follow than
the Wagner and Whitin (1958) dynamic programming
algorithm. However, the computations required for the
analytical optimal algorithm of Donaldson (1977) are
complicated and, for this reason, a number of heuristic
methods have been proposed from time to time by
different researchers for determining the inventory re-
plenishment policy. Silver (1979) using the Silver-Meal
(1969) heuristic developed an approximate solution pro-
cedure for the case of a positive linear trend in demand
to reduce the computational effort needed in Donaldson
(1977). This heuristic determines each lot-size sequentially,
one at a time, by minimizing the total system cost per
unit of time rather than minimizing the total variable
costs up to the time horizon.
The above inventory models under both dynamic and
non-dynamic programming approaches do not allow
shortages. The only inventory model that allowed
shortages was that of Zangwill (1966), which extended
the Wagner-Whitin discrete-in-time dynamic algorithm.
Received 23 April 1996. Revised 28 August 1996. Accepted 6
Septem ber 1996.
t Department of Mathematics, Jadavpur University Calcutta-
700032, India.
considered first by Deb and Chaudhuri (1987) who
proposed a heuristic for determining the economic
replenishment policy that was based on Silver's (1979)
method. Goyal (1988) and Dave (1989a) pointed out the
error in the formulation of the cost function in Deb and
Chaudhuri (1987) and the correct versions of the heuristic
method were given by Goyal (1988) and Dave (1989b).
Dave and Patel (1981) incorporated the possibility of
deterioration in the inventory models with the assump-
tions that demand rate was deterministic and time
proportional, the rate of deterioration was constant, the
planning horizon was finite and the replenishment
periods were equal. Sachan (1984) extended this model
to cover the backlogging option after correcting some of
its approximation errors. Since the demand rate changes
linearly with time, both the order quantity and frequency
of orders should vary with the passage of time in order
to achieve the minimum inventory cost. Keeping the
ordering cycles constant and only increasing the order
size rather than adjusting both ordering cycles and the
size of the orders should result in a higher inventory
cost. This phenomenon induced Bahari-Kashani (1989)
to relax the assumption of equal replenishment cycles in
his heuristic, which permitted variation in both the
replenishment cycle length and the size of the order. The
same model was considered by Xu and Wang (1990) in
discrete time. Recently Chung and Ting (1993) have
developed a more general heuristic model for obtaining
the replenishment times of this inventory system whether
or not a planning horizon exists.
All the above models assume that the holding cost is

002G-7721/97 $12.00 iO 1997Taylor & Francis Ltd.

154 B. C. Giri and K. S. Chaudhuri

known and constant. In reality, the holding cost may not 2.J. Heuristic I
remain constant over time; its value is likely to change Let Qlt) be the inventory (or shortage) level at time
with time due to its complex structure. In the present (R j _ 1 + t) during the ith replenishment cycle (0::; t ::; 1;,
article, we develop two heuristic procedures for a single i = 1,2,3, ...), where R j_ 1 is the total time elapsed up to
item inventory system where the demand rate, deteriora- and including the (i - I )th cycle and 1; is the ith
tion rate, ordering cost, holding cost and shortage cost scheduling period to be determined. Let Sj (::; 1;) be the
are all assumed to be linearly increasing functions oftime. shortage point at which the inventory level in the ith
Shortages in inventory are allowed and are completely replenishment cycle drops to zero. The differential
backlogged. To obtain the heuristic, each model is equations governing the system during the ith cycle are
developed under an infinite planning horizon. The
heuristic rule is then modified to accommodate models
dQli(t) + (e + yR j
_ , + yt)QIi(t) = -(a + bR j
_
1
+ bt),
with a finite time-horizon. Finally, both the heuristic dt
procedures are illustrated with the help of a numerical
example and a comparison of their performances is made. 0::; t ::; s., i = 1,2,3,... (1.1)

with the boundary condition QIi(SJ = 0; and

2. Development of the model
The following assumptions and notations are used in
dQ2m
---=a+bR j _ 1 + bt, s, ::; t s 1;, i = 1,2,3, ...
dt
developing the model.
(1.2)
(1) The demand rate f(t) changes linearly with time, i.e.
with the initial condition Q2j(Sj) = O.
f(t) = {/ + bt where (/ is the rate of demand at time
The solution of (1.1) is given by
zero and b is the rate with which the demand rate
increases.
(2) Replenishment rate is infinite; i.e. replenishments are
instantaneous.
Qli(t) = exp ( - Ft -. h( 2) f' (E + bu)

x exp (Fu + hu 2 ) du 0::; t ::; Sj, i = 1,2,3, ...

(3) The unit-item cost C is known and constant.
(4) The holding cost h(t) per unit per unit of time is [since Qli(Sj) = 0] (1.3)
assumed to vary with time as where

h(t) = Ch + IXt, Ch > 0, IX > O. E=a+bR j _ 1

(5) The ordering cost C,(t) per order is assumed as F = e + yR j _ 1

The holding cost for the ith replenishment cycle is

C,(t) = C, + pt, C, > 0, p > o.
(6) Shortages are allowed and are completely back- n, = Jr" (C
0 h + IXR j_ 1 + IXt)Qli(t) dt
logged. Since the shortage penalty cost C2 (t) per unit
time is usually a fraction of the holding cost per unit
time, it is assumed that
r (G + IXt) exp (-Ft - h( 2)
= Jo
s
,

Cit) = rh(t), r> O.

(7) A variable fraction d(t) of the on-hand inventory

x {f' (E + bu) exp (Fu + hu 2 ) dU} dt

deteriorates per unit time where where G = Ch + IXR j_ l

After a change in the order of integration H, can be
= e + yt; (e, y)

rU:
d(t) 0::; J. rewri tten as

It is further assumed that there is no repair or

replacement of the deteriorated items.
n, = (G + IXt) exp (-Ft - h( 2) dt}(E + bu)

If interest rates decline in a particular year, the holding x exp (Fu + hu 2 ) du (1.4)
cost and the ordering cost are likely to decline, in which The ordering cost for the ith cycle is
case IX and p will be negative. Our model is equally
applicable to this case. Aj = C, + Ri-IP' i = 1,2, 3, .. , (1.5)
 Heuristic models for deteriorating items with shortages 155

r
The total number of deteriorated items for the ith cycle and
is given by

o, = Qu(O) - r (E + bt) dt
exp (Fs j + -irsr) (G + rxt) exp (-Ft - -irt2) dt

= r (E + bt){exp (Ft + t;t 2) - I} dt i = I 2,3, ...

+ C[exp (Fs, + -irsr) - I]

-r(T;-Sj{G+~(T;+S;)J=O i= 1,2,3, ...

(1.6) (1.1I)

The shortage level at any time t (s, ~ t ~ T;) is If shortages are not allowed (i.e. r .... 0Cl), then we have
from above, T; = s., i = 1,2,3, ... Equations (1.10) and

Q2i(t) = E(t - s.) + 2:b (t 2 - Si)'

2
(1.7)
(1.1I) can be solved for (sr, rr),
the optimal values of
(s., T;), by using any suitable multidimensional search
technique. Then TRCUTr, the corresponding optimal
The shortage cost for the ith replenishment cycle is value of TRCUTj, is obtained from (1.9).
One may proceed with R, = R i - 1 + rr
to obtain the

s, = r 1~' (C s;) + ~ (t 2 - sr)} dt

optimal solution for the next cycle.
h + rxR i_ 1 + rxt){E(t -

2.2. The model with finite horizon

= reT; - sY[~ {3E + beT; + 2SJ} The above heuristic is also suitable for the model with
a finite time horizon L. We keep on computing therr,
+ rx{~ (2T; + s.) + ~ (T; + S;)2} 1 duration of each cycle by the above algorithm until RJ'
the first replenishment time to exceed L is reached.
Usually D=! rr is shorter than the horizon length L.
The total inventory cost (TIC,) for the ith replenishment In order to close the inventory system exactly at time L,
cycle is then equal to the sum of the ordering cost, holding the scheduling period and the corresponding shortage
cost, shortage cost and deterioration cost, that is point of the final replenishment cycle are to be fixed as
Tj = L - D=! rr
and sj = Tj respectively. This means
TIC i = Ai + Hi + S, + CDi i = 1,2,3,... (1.8) that no shortage is to be allowed in the last cycle.
It is evident that even if the last cycle is of small
Let TRCUT i be the total inventory cost per unit time in duration, the management has to place the purchase
the ith cycle. Then order once more in order to satisfy the demand right up
to the horizon L. This approach results in an increase of
I the system cost in general. However, no other option is
TRCUT i = - (TIC i ) i = 1,2,3,.. . (1.9)
T; left to adjust the time schedules T T2 , , 1J- I to cover
exactly the time horizon L without " allowing shortages
The first-order necessary conditions for TRCUTi(T;, s.) in the last cycle. This complexity may be removed by
to be optimum are adopting the procedure suggested by Goyal et al. (1992).
They have introduced shortages in every cycle of a finite
a
-(TRCUT) =0
time-horizon inventory model. We now develop the
aT; , following heuristic in the light of Goyal et al. (1992).

and
2.3. Heuristic II
a . Let li(t) be the inventory (or shortage) level at time
-a (TRCUT j) = 0, i = 1,2,3, ... , (Rj- 1 + t) during the ith replenishment cycle (0 ~ t ~ T;).
s,
The ith cycle starts at time R i - I with zero stock. It is
which imply divided into two sub-intervals (0, t;) and (ti> T;). There is
no stock in (0, r.): replenishment for the ith cycle is made
at t i The quantity replenished at time t i is partly used
TIC i - rT;(T; - s;)(G + rxT;){E + ~ (T; + S;)} = 0, to satisfy the accumulated shortage during the period
R i - I to (R i - 1 + r.). The inventory level reduces to zero
i = 1,2,3,... (1.10) again at time R, = Ri - 1 + T;; i = 1,2,3, ...
156 B. C. Giri and K. S. Chaudhuri

The instantaneous state of I,(t) is described by the It is observed that TCUT, is a function of two continuous
following differential equations: variables 1; and tl' Therefore. the first-order necessary
conditions for TCUT i(1;. II) to be optimum are
d/l/(t)
-- = a + bR i _ 1 + bt, 0::; I ::; Ii> i = 1.2.3.... a a
dt - (TCUT;) = 0 = - (TCUT i ),
et; ati
(2.1)
which lead to
with the initial condition I li(O) = 0; and
d/ (t ) 1;(E + b1;{ex p (F1; + hm
-21- + (0 + yR i _ 1 + yt)/ 2 i(t) = -(a + bR I _ 1 + bt).
dl
II ::; t ::; 1;. = I. 2. 3... .
i (2.2) x fTI (G + at) exp ( - Ft -'!Yt 2) dt + 'c
I,
with the boundary condition 121(1;) = O.
Solving (2. J) we get the shortage level at any time
1(0 s I s Ii) as
x exp {F(1; - ti) + h(Tf - tm - C J- ,TCI =0
(2.8)
(2.3)
and
Therefore. the shortage cost for the ith replenishment
cycle is {G + t, + C(F + yt;)} exp (-Ft i - htn

S, = r [GE
,
- I
2 I
2+ (Gb
-6 + -aE)
3
t:3+ -ab t4J .
8
(2.4) x fT' (E + bu) exp (Fu + hu 2 ) du
I I I,

The solution of (2.2) is given by - r [ GEt i Gb + aE ) t 2+ 2"

+(2 ab Ii3J = O. (2.9)
l

12;(/) = exp (-FI - 1yI2) ITI (E + bu) The second-order conditions cannot be easily checked.
Consequently. we shall assume that (2.8) and (2.9) are
x exp (Fu + 1yu2) duo Ii::; I ::; 1;. enough to determine the minimum of (2.7). Equations
(2.8) and (2.9) are highly nonlinear in the replenishment
The holding cost H; for the ith cycle becomes time t, and the scheduling period 1; and they cannot be

H; = f'{f (G + a/) exp (-Ft -1yt 2 ) d/}(E + bu)

solved by any analytical method. However. we can
solve these equations numerically by using any multi-
dimensional search technique.
x exp (Fu + 1yu2 ) duo (2.5) We now give below the different steps of the optimal
solution procedure in an algorithmic form when the
The number of deteriorated items for the ith cycle is
above model is considered with a finite planning
TI horizon L.
Vi = 12 i( / l ) -
f I,
(E + bl) dt
Step 1. Start with R i - I = 0 and n = 1.

f
T'
= exp ( - Ft, - ht?) (E + bu) Step 2. Compute 11' and It. the optimal values of 1; and
I,
t, respectively, by solving (2.8) and (2.9). In order
x exp (Fu + 1yu2 ) du - E(1; - I;) - ~ (Tf - If).
to do so any multidimensional search technique
is to be followed and all the integrals are to be
replaced by suitable quadrature formulas.
(2.6)
Step 3. If the condition D;"
11' < L s I Tt isD=
Therefore. the total cost for the ith replenishment cycle satisfied, go to Step 5; otherwise goto Step 4.
of the inventory system becomes
Step 4. Let R, = R I _ I + 11', n = n + I and goto Step 2.
TC i = Ai + Hi + CD; + S;. (2.7)
Step 5. Obtain the modified optimal replenishment
Let TCUT I be the total cost per unit time of the ith cycle. intervals by the following
Then , L
Tt = Tt~. i= 1.2 ..... n-1.
I
TCUT, = - (TC;).
1; i=1
L11'
 Heuristic modelsfor deteriorating items with shortages 157

Step 6. Determine the corresponding shortage points amount equivalent to approximately 67'16% of the cost
tni = 1, 2, ... , n - 1) using the relation (2.9). of the first cycle whose length is 24751 units of time. One
may question the usefulness of having the sixth cycle at
Step 7. Compute the total variable costs of the replenish- such a relatively high cost and small length of time. One
ment schedules using (2.7). should note that no option, other than that of allowing
the sixth cycle, is left because (i) the time schedules T"
T2 , T3 , are to be adjusted so as to cover the time
3. Numerical example horizon L exactly and (ii) no shortage can be allowed in
Let us take the parameter values of the inventory system the last cycle. Moreover, a major component of the cost
as (114' 3257) of the sixth cycle is the initial ordering cost
C,(900).
Cs = 90'0, Ch = 5,0, a = 20'0, b = 2'0,
C = 0'5, r = 0'3, e= 0'01, IX =0 01,
Heuristic II
With the same parameter values as above, we first find
fJ = 0'15, Y = 0001 L = 1l0 from (2.8) and (2.9) the rough estimate of the values of
in appropriate units. Ti and ti(i = 1,2,3, ...) as shown in Table 3. It is clear
from the table that the sum of the first five scheduling
Heuristic I periods exceeds L. Hence we consider the first four
The optimal solutions for the successive replenishment scheduling periods and adjust them by Bahari-Kashani's
cycles are shown in Table 1. It is clear from Table 1 that (1989) method. Table 4 shows 'I]", the adjusted values
the sum of the first six scheduling periods exceeds the of Ti; tt and TC{', the associated modified values of ti
time horizon L. The heuristic actually chooses ~ = and TCi respectively.
L - "Lr= 1 Ti as the final scheduling period. The modified In this case, the total inventory cost over the time
optimal solution of the last cycle is shown in Table 2. horizon L is 9460234 and the number of replenishment
Here, the minimum system cost = 9862444 and the cycles is 4. Thus, Heuristic II results in a 4'08% decrease
number of replenishment cycles = 6. It is observed that in the inventory system cost. It is to be noted that
Ti+ I < Ti while TIq+ I > TIq (i = 1,2,3, ...). A Heuristic II allows shortages in all cycles.
steady increase in the average system cost over time We now give in Table 5 a clear picture of the inventory
occurs because the different cost components increase system by giving the shortage level, inventory level
steadily with time. and replenishment quantity at each reorder point
It is noted that the cost of the sixth cycle is 1143257 ri ( = R;-l + tn i = 1,2,3,4.
with a cycle length of 0-4632 of a unit of time. Comparing
with the first cycle, 1871 % of a period of time adds an
Table 3. Rough estimate of the optimal cycle lengths and
associated reorder points
Table t. Optimal solutions-scbeduling period, corresponding
shortage point and total inventory cost for the successive Rt - i ,
l~ T1
replenishment cycles
1 00 19557 24806
Ri _ 1
s~ , T1 Tlq 2 24806 1-8087 23058
3 57864 17055 2'1812
I 00 05801 2-4751 1702244 4 69676 16285 20873
2 2-4751 0'5417 2-2387 172-9276 5 90549 15687 20137
3 47138 05139 20661 1748526 6 11'0686
4 6'7799 04926 19324 1763452
5 87123 04754 18245 177-5689
6 105368 04613 17349 1786131
7 122717 Table 4. Adjusted T1 witb associated modified values of,r and
Tq
158 B. C. Giri and K. S. Chaudhuri

Table 5. Shortage level, inventory level and replenishment errors in the parameters a, C" Ch and r, particularly to
quantity at the reorder points negative errors, while it has very low sensitivity to errors
in b. The model is, however, insensitive to errors in
r, 1u(r,) 12,(r,) 1,(rJ parameter C.

I 23859 53-4105 160052 694157

2 52169 622029 18'6347 80'8376
3 7-8907 699756 209632 909388 5. Concluding remarks
4 104460 77-1085 230943 1002028 In this article, we have developed two heuristic models
allowing shortages. In developing the models, the demand
rate is assumed to be a linearly increasing function of
time. This assumption is quite appropriate from a realistic
4. Sensitivity analysis point of view because it is often seen in the market that
To have a clear understanding of the effects of changes sales of items, such as electronic goods, fashionable
in the input parameters, it is essential to examine, in clothes, luxury goods etc, increase steadily after gaining
depth, the sensitivity of the developed heuristic models. consumer acceptance.
Such an analysis will help us to understand how errors Shortages are allowed and are completely backlogged.
in the estimation of input parameters influence the In fact, consideration of shortages is a good alternative
decision variables. Since Heuristic II is more efficient than if the inventory holding cost of the stored item is high
Heuristic J, we restrict ourselves to the sensitivity analysis compared with its backorder cost. Also, stockout is one
of Heuristic II only (Table 6). of the unavoidable characteristics of most inventory
The percentage changes in the total inventory cost systems.
indicate that the model is moderately sensitive to the Deterioration of physical goods is one of the real
factors in any inventory system. There are items which
undergo either direct spoilage or physical decay in course
Table 6. Effects of changes of input parameters on the total
cost (TC') of the inventory system of time. Consideration of the deterioration factors as one
of the modelling aspects is, therefore, quite logical.
Change in The holding cost is composed of the opportunity cost of
parameter Change capital tied up in inventory, along with taxes, insurance,
Parameters values (%) n TC' in TC' (%) storage, handling, depreciation, deterioration and risk of
obsolescence' etc. In most of the models, it has been
-20,730
r~
4 7499086 assumed that this cost is known and stationary. In reality,
-20 4 867-9536 -8,252 its value changes over time due to its complex structure.
{/
+20 5 9822299 + 3-827 Therefore, it is quite reasonable to assume that this cost
+50 5 10750484 + 13-638
varies with time rather than remaining constant.
-10,403
r~
4 8476038 In the numerical section, we have evaluated the
-20 4 9068890 -4'136 integrals by replacing them by suitable quadrature
b
+20 5 9514744 +0576 formulas while solving the nonlinear equations. However,
+50 5 998'1530 + 5510 robust nonlinear equation solvers such as the MATHE-
-0,011 MATICA package can also be used in thiscase,
r~
4 9459165
-20 4 9459819 -0,004
C 4 9460680 +0005
+20
+50 4 9461335 +0012
Acknowledgment

r~
3 6990874 -26'102 The first author expresses his sincerest thanks to the
-20 4 840'4225 -11'162
Ch University Grants Commission (UGC), New Delhi, and
+20 5 10049111 +6'225
to Jadavpur University, Calcutta, for providing financial
+50 6 11100205 + 17335
support to conduct this study.
663-7814 -29,834
r~
6
-20 5 8304045 -12,221
C. +20 4 10177773 + 7585
4 11255040 + 18972
References
+50

r ro
-20
+20
+50
3
4
5
5
7106692
852'1939
988'2169
1079-4744
-25'878
-9,918
+4460
+ 14\06
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