MANAGEMENT SCIENCEVol. 16, No. 8, April, 1970Printed in U.S.A.
ADAPTIVE LIMITSININVENTORYCONTROL*
SAMUEL EILON
AND
JOSEPHELMALEHImperialCollegeofScience and TechnologyInconventionalreorder policies for inventory control,stocksare allowedtofluctuate betweentwo prescribed imits:alowerlimitcorresponding
toasafetystocktoguard againstrunouts,and anupperlimit to whichthe stockisreplenishedfromtimetotime.Methodshavebeen suggestedforcomputing optimalupperandlowerlimits for the case of stationary demandpatterns.The adoption of two rigid limitsforcontrollinginventoriesfornonstationarydemand patterns,which include trendsand seasonalfluctuations,isclearlynot satis-factory. Publishedpapers in inventory control rarely devoteenough attentionto theneed for a linkbetween forecasting and a reorder policy.Amethodissuggestedinthis paperforcomputing adaptivecontrol limitsbasedon aforecasting procedure thattakes accountof seasonal fluctuationsand trends.The method has been simulated forinventorymodels with varying parameters.Invariably ithas yielded results which were equal toandusuallybetterthanthoseobtained by the optimal "fixed-limits"method.Forexample,inthecase ofa normaldemand distribution, andagiven levelof satisfying demand, thereductionincostsre-sultingfrom theadaptive control procedurewas foundto bewell over30%.
Introduction
The essence ofinventory control isto determine when toorder and how muchtoordernew stock.Most of the literatureisconcernedwith thefollowingalternativepolicies:s,S-also knownas the two-bin system,where an orderis placed when the stockleveldeclinestos,the order quantity being
Q=S
-
s; the stocklevel fluctuates betweenthetwo limitssandS, achievingtheupperlimitwhenreplacementisinstantaneous.S,T-alsoknownasthecyclicalreviewsystem,wherereplenishmentis effectedeveryintervalTtobringthestockleveltoanupperlimitS.s,S,T-this is essentiallyans,S system,except that reviewof the stock isnotcarriedoutcontinuouslybut atevery timeinterval T;ifthestock limit is then below
s,anorderforreplenishmentis madeforQ
S
-
s.There has been aconsiderableamountofresearchinto optimizationof inventorypolicies.Soineofthe mainconclusionsmay be brieflysummarizedasfollows:1. It is impossibleto draw a universalcomparison betweenvarious inventorypolicies,since the behaviour of severaldependsonthe initialconditions of the systeminquestion.2.Given aset ofinitial conditions, itcan be shown that atleast one of the optimalpoliciesmustbe of thes,$type.3.In the case of astationarydemandpattern, an infinitehorizon, a discountingfactor(a < 1)and when abacklogof unsatisfieddemandisallowed, an optimals,S policycanbedetermined, irrespectiveof initial conditions.4.Whendemandpatterns changewithtime,whenlead-times arevariable,andwhenunsatisfied demandislost,themathematicaltreatmentfor formulatinganoptimal inventorypolicybecomesextremely complicated,veryoften insoluble.Wag-ner et al[4],whoinvestigated800different inventory cases,demonstratedthecompu-tationaldifficultiesinvolvedindetermining optimal controllimits and suggested ap-proximate empiricalsolutions.
*ReceivedJanuary, 1968;revisedMay1969.
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