Engineering Costs and Production Economics, 9 (1985) 59-64

Elsevier Science Publishers B.V., Amsterdam ~ Printed in The Netherlands

MANAGEMENT OF MULTI-ITEM, MULTI-GROUP

INVENTORIES WITH MULTIPLE CRITERIA UNDER SERVICE
LEVEL CONSTRAINTS

S. Ramani and K.V. Krishnan Kutty

Indian lnsrirure of Technology, Madras 600036 (India)

ABSTRACT

A group of 306 spare parts items in a
transport organisation are classified into nine
subgroups, based on multiple criteria. Each
subgroup is assigned a specified service level
under constraints. The inventory system total
variable cost is evaluated and plotted against
weighted service level for different valid
combinations of service levels, chosen from
accountably infinite possible combinations by
an extreme value methodology suggested in
this paper. The results indicate the existence
of a number of local minima and a global
minimum for the total variable cost curve.
Also, the total variable cost is seen to be
bounded in a region yielding a minimum cost
curve. The identification of this global
minimum cost curve is a pointer to effective
minimum cost inventory management of
groups of spare parts.

INTRODUCTION popular ABC classification. While this takes

into account the annual dollar investment,
it ignores the item criticality. Thus, inventory
Inventory control is an area that has management based on ABC classification is
received much attention from practitioners inadequate in the case of spare parts. We must
and academicians. Models and methodologies resort to the combined application of vital/
are available to tackle single-item inventory essential/desirable (VED) items classification
and multi-item inventories. The management along with ABC classification. This gives rise
of a single-item inventory is simpler com- to a situation of multi-item/multiple criterion
pared to the management of multi-item inventory management where a number of
inventories. Attempts to translate or apply subgroups of inventory are present.
the models related to a single-item inventory Each of the nine subgroups.of ABC-VED
to a large number of items is really cumber- classification will require the application of
some, time consuming, uneconomical and differential service levels. Such an approach
sometimes irrational also. can reduce the investments in inventory to a
Multi-item inventories are controlled by the substantial extent while offering the required

0167-188X/85/$03.30 0 1985 Elsevier Science Publishers B.V.

60

minimum service level. Each subgroup, when An attempt to group the items based on
subject to the S-R policy, will exhibit an these two criteria can safeguard both carry-
optimum service level. When the differential ing cost and service level. This gives rise to
service levels are employed, a set of a configuration involving nine subgroups as
constraints develop, whereby as a whole the depicted in Example 1 [ 81.
inventory system’s optimal values may not
be the sum of the subgroup optima which is
in full corroboration with the basic concepts SERVICE LEVEL CONSIDERATIONS
of systems theory.
This paper is an attempt to identify such a Since A items share larger investments,
multi-item, multiple-criterion inventory situa- their service levels should be maintained as
tion, developing a composite subgrouping low as possible with increasing possibilities to
situation, each subgroup being attached a B and C items and in that order. Similarly
service level following a constraint. Such a V-items are functionally critical, deserving
problem is solved for the use of inventory maximum possible service level. E and D
practitioners to yield minimum cost and items require reducing amounts of service
optimal service levels. Also, the evolutior of level only. In Example 2 service level PBE,
a minimum cost curve under such situations i.e., the service level of a B class Essential
- which until now has escaped the attention item, is constrained as follows:
of inventory researchers - is highlighted in
this paper. ‘BD < ‘BE < ‘BV
(1)
‘AE < ‘BE < ‘CE

Such constraints will apply to all the service

GROUPING UNDER MULTIPLE levels of the subgroup. A common service
CRITERION level is advocated to each subgroup [ 1,7].

Grouping for dollar/rupee/pound sterling

value control is an extensively used method Example 2
[2.5,12-141. The grouping ignores the
Service level )
criticality of items [ 141 and has a host decreasing
of drawbacks. The functional aspect should
Item
receive attention and the importance of the V E D
class
items should be duly recognised. Such
attempts to classify items have been pointed A ‘AV ‘AE ‘AD
out by Lampkin [9] and Lawrence et al.
B ‘BV ‘BE ‘BD
[ 101. Thus the items are considered under
vital, essential or desirable functions, which C PCV ‘CE ‘CD
is known as VED classification.

Example 1 A MODEL FOR MULTI-ITEM

MULTIGROUP UNDER MULTIPLE
CRITERION

Assume that the order point/order quantity

system is being used with a normal demand
 61

and backlogging condition [ 13,l 1,6]. The Number of units short (ns)ijk = (aL)ijk [G(K)]ijk
relevant costs of this system per year are the
= &j/c [G(K)lijk (x&k (10)
carrying cost (C,), ordering cost (C,) and
shortage cost (C,) such that the total variable
Amount Of buffer Bvk = Kijk (OL)vk
(11)

cost
Recorder point Rqk = (zL)Qk + Kok (U&k (12)
TVC = C, + C, + C, (2)
(ts)ijk the duration of shortage for the ith
=

Service level is defined as: item in the (i,K)th group.

Total number of items supplied ex-stock in a period The duration of shortage as suggested by
P=
Total number of items demanded in the same period Cohen [4] is
= 1 -/.L.G(K) (3)

(ts)ijk = (13)
P
z coefficient of variation = 2
XL
UL = Standard deviation of demand during c, = Xxx Bijk cijk Cc+~~f[(Qo)~kDI cijk’cc (14)
kji
lead time = o,&
ox = Standard deviation of demand cc = carrying cost/unit/year expressed as a decimal
random .variable X
XL = Mean demand during lead time = XL c, = ~~~ Niik Co (15)
1 = Mean demand kji

L = Lead time co = Ordering cost

G(K) = Partial expectation function [ 21.
R-XL c, = XzL: (“&j/c (r&k (Cs)jjk Njj/c (16)
K = - , R being the recorder point kji
OL
c, = shortage cost/unit/unit time
The nine subgroups shown in Exhibit 1
can be considered as the elements of a (3 X 3)
matrix.
SERVICE LEVEL COMBINATIONS
Let i = the number of items in a subgroup
i= 1,2,...YZjk
It is now possible to compute the cost of
i = number of rows, j = 1,2,3
any subgroup given the service level. Recalling
k = number of columns, k = 1,2,3
the nature of constraints as in Example 2,
Then,
each subgroup can be affixed a certain service
(UL)ijk= (OX)ijk(L@f)“z (4) level and the total cost of the system can be
_ evaluated. For example the combination in
(xL)jjk = xij/c L@ (5)
Example 3 is a valid combination and satisfies
Pijk = (eL )ijk/(xL)ij/c (6) the constraints discussed above

If C and D denote the unit cost and annual

usage of the ith item respectively, Example 3

usagevalue of the ith item = Cqk ‘Dvk (7) V E D

Niik = No. of orders for the ith item = Dijk/(Qo)ijk (8) A 0.950 0.940 0.930

Q, = Economic order quantity B 0.980 0.960 0.950

[G(K)Jijk L!z& (9) C 0.995 0.980 0.970

Pijk
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But such combinations selected at random EXTREME VALUE COMBINATIONS

do not guarantee the minimum cost of the
system. It can be obtained only through the In this context we consider only the
analysis of a number of alternative combina- extreme value combinations to reduce the
tions of service levels. This indicates that in number of combinations to a few. The
each subgroup a range of service levels should underlying principle in the selection of
be considered and the valid combinations extreme value combinations is to consider
among them should be chosen. For example, one service level of a subgroup as fixed and
consider the range of service levels in try only the extreme combinations (dropping
Example 4. intermediate combinations) of other groups as
can be understood from Example 5. The
example shows how five extreme value valid
Example 4 combinations are obtained with the service
V D
level of an A Class vital item fixed (0.9).
I I I
E
I I For a majority of practical problems, such
as the one being studied, the number of such
combinations will be less than about one
hundred.
C 0.99 - 0.999 0.92 - 0.97 0.88 - 0.94

BEHAVIOUR OF THE COMBINATIONS

If each of these ranges are considered in, To study the behaviour of such combina-
say, 20 steps of increment, the total number tions, 306 spare part items with 9% A items,
of possible combinations would be 209. 2 1% B items and 70% C items were con-
An examination of all these combinations is sidered. These items were further found to
not rewarding. A substantial reduction in the possess 39 vital items, 104 essential items
number of combinations can be made by and the remaining desirable items with usage
imposing the service level constraints on the values of 31.05%, 54.73% and 14.22%,
possible combinations. The resultant number respectively. This group of 306 items, divided
of combinations are the feasible combina- into nine subgroups, was studied for the
tions, even though they may still be very service level ranges in Example 4. Applica-
large to be subjected to analysis as such. tion of the choice of combinations through

Example 5

A_V A-E A-D B-V 8-E B-D c-v C-E C_D

-0.80 -0.92
a __t 0.90 TO.85 -0.97 -0.93 b 0.88
0
0.88 -0.81 - 0.93 4 0.91 4 0.86 __* 0.90 -0.94 _ 0.89
0 0.07 __* 0.93 __* 0.95 + 0.90
0.89 ~0.82 - 0.94 ___* 0.92 __*

\0.83 @ w 095y L 0.88 y \0.96/

1896 /
 63

extreme value combinations yielded 97 forming the minimum points of the curves
combinations. AaA’, BbB’,..., MmM’. These points are con-
For these 97 combinations the total tained in the region bounded by two extreme
variable cost (in Rupees X 10’) was computed curves XX and YY. A decision variable along
and plotted against the weighted service level AaA’ indicates the availability of a minimum
as shown in Fig. 1. The weighted service level at ‘a’. Going down the graph, a decision
is the weighted average of the service levels of variable located at ‘a’ can travel down along
each subgroup, each subgroup service level b,c,..., m to yield a cost curve A” I”. This
weightage being the fraction of total invest- curve shows a lowest point P,, which may be
ment in inventory [ 2,4]. considered as the global minimum. Thus P,,
and the corresponding value of the total
variable cost (ordinate) in Fig. 6 are the
optimal weighted service level and the total
variable cost for the system under considera-
tion.
If a line is drawn parallel to the abscissa
and through b, it will cut the curves XX and
YY at P and Q respectively. PQ shows the
range of weighted service levels possible for
the total variable cost corresponding to b.
The point Q gives a combination with higher
weighted service level at a higher investment
than point P, but for the same total variable
cost. Going vertically down from Q to R,
on XX a much lower total variable cost com-
bination is observed for the same weighted
service level. Proceeding similarly from R,
horizontally and then vertically down, the
global minimum is arrived at P,,. Thus,
a minimum cost curve XX is identified.

CONCLUSION

We have made an attempt to develop a

methodology to manage a multi-item, multi-
group spare parts inventory situation under
850 880 91.0 940 97.0 100.0
96 w*ted service level-
service level constraints. The results indicate
the presence of a number of local minima and
Fig. 1. Total variable costs for combination.
a global minimum for the total variable cost.
A satisfying service level combination and cor-
responding costs are identified from the
DISCUSSION graph. It can be shown that the minimum cost
curve XX is very useful especially under
The total variable costs for each combina- capital investment constraints. It is seen that
tion can be arranged to yield a number of sub- the grouping based on multiple criterion and
optimal or local minimum points a, b, c ,...., m, the application of service level constraints
64

can substantially improve operational cost (T,Z) control systems. Operational Research Quarterly,
of the system for stated ranges of service 25 (3): 481-485.
7 Herron, P.D., 1967. Inventory management for
levels for subgroups of spare parts. minimum cost. Management Science, 14(4): B219-
B234.
8 Krishnankutty, K.V. and Ramani, S., 1983. Service
level considerations in ABC-VED grouping. Industrial
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