Es App Invm

Towards the development of an intelligent inventory
management system
Khairy A.H. Kobbacy
University of Salford, Salford, UK
Yansong Liang
University of Salford, Salford, UK
Introduction
Inventory management is a complex problem
area owing to the diversity of real life
situations. Successful inventory manage-
ment requires sophisticated methods to cope
with the continuously changing environ-
ment. Literature is rich with papers about
independent demand inventory modelling
(Fleming, 1992). These provide a theoretical
foundation for the field of inventory man-
agement and makes it one of the most
developed fields of OR. However, the practi-
cal implementation of inventory models lags
behind the development of inventory model-
ling (Silver, 1981).
The discrepancy between theory and prac-
tice of inventory is partly caused by the
different goals of academics and practi-
tioners (Zanakis et al., 1980). Much of the
research is aimed at rigorous analysis of
underlying equations representing the
inventory problems and developing mathe-
matically elegant decision models. This type
of theoretical work is most highly valued by
the academic community. Therefore, there is
often less attention given to providing work-
able solutions to real problems. On the other
hand, inventory managers may not be aware
of the mechanics and applicability of the
theoretical models. This hinders the practical
application of inventory models because an
understanding of the fundamental structure
of complex models is the first step necessary
to provide a workable solution of the problem
being considered. Moreover, the mathemati-
cal techniques and other methods are only
aids to management decision making. They
cannot replace the judgement of human
experts. A manager may have several inven-
tory models available to him, but if he is not
sure which is the best one for the situation,
obviously, he may not be able to solve the
problem effectively. It is clear that when a
manager is faced with an inventory problem
and he has an expert available for choosing
the right model then he can be confident that
the effort put into analysis will be successful.
The emergence of expert systems has pro-
vided a useful approach to solve this problem.
The current applications of expert systems
have demonstrated quite successful results in
terms of better decision making (Bramer,
1988; Land and Hickman, 1993; Buchanan,
1986). In order to reap the benefits of this
technology some inventory expert systems
have been developed since 1988, to help
manage large-scale inventories (Sinha et al.,
1989; Parlar, 1989; Hosseini et al., 1988; Luxhoj
et al., 1993). These efforts have engendered
widespread hopes of effective computer solu-
tions to inventory problems. However, there
is still a lot of theoretical and practical work
necessary in order to achieve this goal.
First, the knowledge bases of these systems
were not fully or properly structured. There
were no inventory models included in Sinha
et al.'s (1989) conceptual system and Parlar's
(1989) system. Sinha et al. (1989) presented a
conceptual design of an inventory expert
system but did not build an actual model
base. The knowledge base in Parlar's (1989)
system is only a collection of inventory
bibliography to help users to find inventory
models in papers and books. The inventory
models built in both of the systems of
Hosseini et al. (1988) and Luxhoj et al. (1993)
were limited to models for constant or
stochastic demand. The functions for the
knowledge-based systems are mainly depen-
dent on what knowledge has been built in the
knowledge base. Therefore, an improper
knowledge base will result in poor knowl-
edge-based systems (KBS).
Second, all of these published systems
seem to lack the ability to automatically
select suitable inventory models, for exam-
ple, by analysing historical data. Thus these
systems can only make a decision after
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[ 354]
Integrated Manufacturing
Systems
10/6 [1999] 354366
# MCB University Press
[ISSN 0957-6061]
Keywords
Inventory control, Expert systems,
Knowledge-based systems
Abstract
This paper is concerned with the
development of an intelligent
inventory management system
which aims at bridging the sub-
stantial gap between the theory
and the practice of inventory
management. The proposed sys-
tem attempts to achieve this by
providing automatic demand and
lead time pattern identification
and model selection facilities. The
process of demand pattern identi-
fication together with the statisti-
cal tests used is discussed. The
models incorporated cover deter-
ministic demand models including:
constant, quasi-constant, trended
and seasonal demand as well as
stochastic demand models. This
paper includes an empirical eva-
luation of the system on real data
from the manufacturing and airline
industries which shows that this
system can lead to significant
savings in inventory cost.
the user has provided all the parameters
necessary for selecting models. This makes
the system just like a classification of in-
ventory models by using computers, or at
best, like the commercial inventory manage-
ment packages.
Obviously, if such systems cannot select
the appropriate inventory model automati-
cally, then they are also unable to switch to a
new model for an item when its demand
pattern has changed. This will have severe
drawbacks when managing inventories with
several thousand items, which is typical in
both manufacturing and service industries.
Third, the problem of interfacing such
inventory expert systems with existing
inventory information systems has been
largely neglected despite the fact that 90 per
cent of companies (Fleming, 1992) use com-
puters for inventory management purposes.
Finally, these published systems seem to be
academic exercises. There are no examples
given by any of the authors to show the
correctness and efficiency of their systems on
real data.
To overcome the drawbacks of the pub-
lished systems and in order to achieve an
efficient knowledge-based inventory system
one should answer the following fundamen-
tal questions.
First, does the system require responses
from the user to questions in order to select a
suitable model? Second, how are the para-
meters used to choose suitable models esti-
mated? Third, which inventory models
should be included in the knowledge base?
Finally, how should the system communicate
with the user and access other management
information systems? The responses to these
questions cannot be made unless a detailed
study is made of inventory modelling, quan-
titative forecasting, existing knowledge-
based inventory systems, and the tools
available to develop a KBS.
The main objective of this research is to
develop such a system which has an appro-
priate knowledge scope and focuses on the
interrogation of the historical data rather
than on asking the user to describe the
system under analysis. In addition, the tools
used to develop the system must be compa-
tible with the most popular software to allow
the proposed system to communicate with
other information systems.
This study has attempted to address the
above questions in order to develop a system
which can offer a new approach to solving
the inventory management problem.
Outline structure of the proposed
inventory expert system
In general, an expert system is designed to
use knowledge and inference procedures to
solve problems that are difficult enough to
require significant human expertise for their
solutions. It is distinguished from other types
of computer-based information systems by
employing knowledge of the techniques,
information, heuristics, models, and pro-
blem-solving processes that human experts
use to solve such problems. There are three
main phases in developing an expert system:
knowledge acquisition, knowledge represen-
tation, and knowledge implementation. The
methodology of the research presented in
this paper is the practical development of the
software called knowledge-based inventory
management system, and its evaluation
using real data (Liang, 1997).
The integration approach, particularly
adapting and incorporating a pattern identi-
fying component and rule base component
into a unified system to integrate the data
collection, parameter estimation, model se-
lection and order decision functions is the
central idea behind the system developed in
this project. This makes the system more
applicable because it greatly reduces its
reliance on the user. Building such an
efficient knowledge-based inventory system
requires a coherent strategy of combining the
computer technology with quantitative
methods.
The structure of the system is outlined in
Figure 1. The user interface of the system
developed in this study includes a top-level
menu (Figure 2), the dialogue boxes, alert
text, confirmation text, and help information
facilities. The appearance of the user inter-
face of this system is highly graphical and the
menus, commands, and dialogue boxes are
visually the same as other Windows applica-
tions.
The data manager manipulates the histor-
ical demand data and other useful informa-
tion. The operations of the data manager are
classified into two categories. The first cate-
gory of commands performs the general
operations on data files such as creating a
data file, deleting a data file, and renaming a
data file. The second category of commands
manipulates the records of the data files by
carrying out the following actions:
1 adding a new item;
2 modifying an existing item;
3 deleting an existing item; and
4 displaying an item.
[ 355]
Khairy A.H. Kobbacy and
Yansong Liang
Towards the development of
an intelligent inventory
management system
Systems
10/6 [1999] 354366
The data manager is also responsible for
updating the demand data when new usage
data become available.
The pattern identifier then analyses the
historical data to identify the demand pat-
terns of inventory items. The output of the
pattern identifier is stored as facts for model
selection. The monitor is used to check
inventory status and generate replenishing
reports. The inventory monitor can provide
the current status of the inventory of any
item and list all items that require replen-
ishment. The model selector chooses a
suitable inventory model based on the user
responses and the facts produced by the
pattern identifier. Then the interpreter
reports the order decision computed by the
calculator.
The system includes an extensive help
facility and also provides integrated access to
packages such as Excel and Word. The centre
part of the system is the pattern identifier
and the model base which are described in
the following section.
Pattern identifier and inventory
model base
Pattern identifier
The selection of policy and hence a model
that will be employed to achieve successful
intelligent inventory management is based
on the current values of parameters which
define the state of the inventory item. Some
of the parameters, such as the discount break
points and the foreign exchange rate, can be
highly changeable or difficult to predict
using mathematical methods, but they can be
readily known to the inventory managers.
Other parameters such as demand and lead
time patterns are usually difficult to identify
without carrying out statistical analysis of
the historical data.
The nature of the demand of an independent
demand inventory item can range from being
stable to highly variable. In general, such
demand is influenced by market forces, in the
case of final products, or failure patterns, in
the spare parts case. Many published papers
deal with the classification of inventory
models rather than demand patterns. Based
on the study of the nature of the demand of
inventory items, a proposed classification of
demand patterns of inventory items is given
in Figure 3.
Muir (1980) proposed that all inventory
items with independent demand can be
divided into statistically predictable and
unpredictable patterns. We propose the
addition of a third category, i.e. the low
demand pattern of slow moving items.
The statistically predictable demand pat-
terns have relatively smooth and repetitive
fluctuations and can be analysed using
statistical forecasting methods. These pat-
terns of demand may change with time, and
hence they are further divided into time
dependent and time independent demand
patterns. In the former, the type of replen-
ishment quantity is dependent on the time
when the replenishment decision is made,
Figure 1
The outline structure of the proposed system
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management system
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while it is not the case in the latter. Under
the condition of time independent demand,
uncertainty may exist. If the demand is
reasonably stable and can be accurately
forecast, then it can be assumed to be
constant. The constant demand is further
divided into absolutely constant demand
(variation is near to zero) and quasi-constant
demand (variation is less than a selected
value). In other cases, if there is significant
uncertainty which can be specified by a
theoretical or empirical distribution, the
demand is referred to as stochastic demand.
The probability distributions that the system
can identify are the Poisson and Normal
distributions. Time dependency of demand
may be caused by seasonal variations, trend
or both. If a product is at its growth or
saturation stage of its life-cycle, then its
demand will tend to increase or decrease,
respectively. Therefore, time dependent
demand is classified into demand with trend,
seasonal, and seasonal with superimposed
trend.
The statistically unpredictable demand
patterns have sudden fluctuations caused by
lumpy demand. They can be classified into
approximative and non-approximative pat-
terns. The demand of an item with non-
approximative pattern has severe, but regu-
lar highs and lows of demand which do not
recur at the same time each year but at
predictable intervals. The demand of an item
with approximative pattern has severe and
random highs and lows of demand which do
not recur predictably. Conventional fore-
casting techniques, including statistical
techniques, are not suitable for dealing with
these demand patterns. However, they may
be approximated by a statistically predict-
able pattern within a tolerable range of error.
An inventory item which has low demand,
i.e. a slow-moving item, usually has very few
transactions occurring over a reasonable
Figure 2
Top-level menu of the user interface
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management system
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historical period. The definition of a slow-
moving item is arbitrary. For example, in
this study, if an item's annual demand is six
or less (or less than a given constant) and the
demand at each time is one or zero, it is
classified as a slow-moving item. Forecasting
demand for a slow-moving item is not an easy
matter. A purely objective estimate of a
demand rate is usually not feasible. Instead,
one should take advantage of the subjective
knowledge of inventory managers.
Test process
To identify the demand patterns described in
the previous section, the system should have
the ability to separate seasonal movements
from the basic demand, if there is any, and
then identify the basic demand pattern. For
the non-seasonal demand, the system should
be able to identify the stationary, linear or
probabilistic demand patterns. A self-expla-
natory flow chart for the demand pattern
analysis process is shown in Figure 4.
Seasonal movements test
The Kruskal-Wallis Test (Farnum and Stan-
ton, 1989) is adopted for detecting seasonal
movements, which is based on testing the
rank of the specific seasonal (Yi
/
(t)). The test
statistic is:
H =
12
n(n 1)
R
2
i
n
i
_ _
3(n 1)
where
n
i
= number of observations in ith season;
n = total number of specific seasons ( =
n
i
);
Yt
/
= specific seasonal for time t;
R
i
= Rank( Y
t
/
) ith season.
If H
2
c
(L 1), where L is the number of
seasons, the demand is seasonal; otherwise,
the demand has no significant seasonality
(where
2
a
(L 1) is Chi-square distribution
with L1 degrees of freedom).
Trend test
The non-parametric test for trend can be
constructed using Spearman's rank-order
correlation coefficient r
s
. It is defined as
Pearson's product moment correlation coef-
ficient r between the ranks of two variables t
i
and y
i
, i.e. to replace a sample of pairs of
measurements (t
1
,y
1
), (t
2
,y
2
), ... ... (t
n
,y
n
) with
their respective pairs of ranks (R(t
i
), R(9
i
))
(Lewise, 1970). The test statistics are
explained as follows:
Small sample (n _ 30)
If there are no ties (two or more observations
exactly equal to each other):
r
s
= 1
6
n
i=1
(R(t
i
R(y
i
))
2
n(n
2
1)
Otherwise, if there are ties, then the exact
relation is (Press et al., 1986):
r
s
=
1
6
n
3
n
n
i=1
(R(t
i
) R(y
i
))
2
1
2
m
j=1
(f
3
j
f
j
)
1
2
k
j=1
(g
3
j
g
j
)
_ _
(1
m
j=1
(f
3
j
fj )
n
3
n
)(1
k
j=1
(g
3
j
gj )
n
3
n
)
where
f
i
= the number of ties in the ith group of
ties among the R(t
i
)s;
g
i
= the number of ties in the ith group of
ties among the R(y
i
)s;
m = the number of groups of ties among
the R(t
i
)s;
Figure 3
Classification of demand patterns
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management system
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10/6 [1999] 354366
k = the number of groups of ties among
the R(y
i
)s.
Large sample (n > 30)
Z =
r
s
j
rs
o
rs
. where j
rs
= 0. and o
rs
=
1
n 1
_ .
For small samples, if [r
s
[ r
c,2
the demand
has a trend; otherwise, and for large samples
if [Z[ Z
c,2
, the demand has no trend.
If demand is found to be increasing (or
decreasing), then the parameters of the linear
statistical model are estimated using the
standard least squares method (Lingren,
1976).
Test for randomness
The turning points test (Farnum and Stanton
1989) is used to check whether the demand
pattern is random or not. The turning point
in a time series is a point where the series
changes direction. Each turning point repre-
sents either a local peak or local trough. This
method is based on the premises that a
trended or positively autocorrelated series
should have fewer turning points than a
random one and a negatively autocorrelated
series should have more. If the series is
actually a random series, the sampling dis-
tribution of the number of turning points U is
approximately normal for even moderate
numbers of observations (n _ 10), i.e.
Z =
U j
u
o
u
. j
u
=
2(n 2)
3
. o
u
=
16n 29
90
_
If [Z[ Z
c,
2
, the demand is not random,
otherwise, the demand is random.
Identification of probability distribution
Under stochastic condition, we need to iden-
tify a suitable probability distribution for
demand. As mentioned above, two distribu-
tions can be identified by the system, i.e.
the normal distribution and Poisson
distribution.
To test the appropriateness of using the
Poisson distribution to describe the demand
pattern for large samples, the modified
Pearson's Chi-square (Lingren, 1976) statistic
is used, i.e.
2
=
m
i=1
[f
i
n
i
(
0)[
2
n
i
(
0)
and the statistic
2
=
1
n
m
j=1
f
2
j
j
(
0)
n.
is used for the cases of small samples (n _ 30).
Where 0 stands for the probability distri-
bution parameter to be tested,

0 is an
estimate of 0 obtained from the sample,
i
(0)
is the probability of category i if the as-
sumption that

0 = 0 is true and m is the
Figure 4
The flowchart of demand pattern identification
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management system
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number of categories of sample which is
obtained using a rule of thumb, say, the
sample size n is four or five times m.
If
2
>
c,2
, then reject the suggested
distribution; otherwise accept the suggested
distribution.
To test the appropriateness of using the
normal distribution to describe the demand
pattern the Kolmogorov-Smirnov statistic D
n
(Lewise, 1970) is used:
D
n
= sup
all x
[F
n
(x) F(x)[
where F(x) is the suggested distribution
function and F
n
(x) is the sample cumulative
frequency. If D
n
> K (reject limit) reject the
suggested distribution; otherwise, accept the
suggested distribution.
In selecting the methods for the statistical
tests discussed above, the following consid-
erations have been taken into account. First,
nonparametric methods are most preferred
because we cannot assume the kind of
demand that an item has before the testing is
carried out. Second, the methods with fewer
assumptions are selected because more re-
strictions tend to limit the applicability of the
methods. Finally, the selected methods must
be suitable for programming because they
will be incorporated into a computerised
system.
The mean and variance of an item's
demand, that are used in the above tests,
were estimated from the past n demand
values, where n is decided by the user. The
period of time over which these observations
are made is obviously dependent on the
frequency of saving the demand data. When
new data become available, old values are
discarded, e.g. as in moving average calcula-
tions. The frequency of updating demand
pattern identification and the impact of
changing the significance levels of the above
statistical tests are discussed later.
Identifying lead time pattern
Most inventory items have a lead time
between placing and receiving an order. The
method used in this system depends on the
availability of data. If data are available, then
a statistical method can be used. But if data
are not available, as is the case in many
practical situations, then a subjective
method is used.
The statistical methods used here are
similar to, but simpler than, the methods used
with demand identification. The lead time
pattern is classified into constant and sto-
chastic. Thus the process of pattern identifi-
cation starts with run test to decide whether
the lead time is constant or stochastic. If the
lead time is constant, then its average value is
used. Otherwise, the Kolmogorov-Smirnov
statistic is used to test the goodness of fit of
the data to the normal distribution, and the
modified Pearson's Chi-square statistic to test
the goodness of fit to the Poisson distribution.
If both tests were negative, then an empirical
distribution can be used.
The subjective method used to estimate the
lead time is based on Bayes' theorem. Basi-
cally, if we use a number of experts to give
their opinions about the number of the lead
times that fall within a given interval, then
using the property of the Dirichlet distribu-
tion (Kendall and Stuart, 1977) the frequency
of the lead time in the ith interval can be
obtained (Liang, 1997).
Inventory model base
From the practical point of view, a good
inventory model should feature:
.
the analysis process of obtaining the
model is straightforward and easy to
understand;
.
the ``how many and when to order''
decisions made by the model do not
include complicated algorithms;
.
the model has few restrictions and can
cope with a wide range of inventory
problems; and
.
the application of the model will lead to
efficient inventory management and sig-
nificant cost savings. In what follows, the
models included in the system's knowl-
edge base are discussed.
Models for constant demand
The constant inventory problems are char-
acterised by the features that both the
demand and lead time patterns are known
with certainty and stay constant in the
future, and the ordering cost and holding cost
are constant. Figure 5 illustrates the possible
types of the constant demand inventory
models. In this Figure, ``Q1-Q12'' refers to a
variety of the economic order quantity mod-
els which are detailed in Liang (1997). The
factors which affect model selection for items
with constant demand include: whether
shortage is allowed, presence and types of
unit price discount, and supply rate. In the
case of back ordering, there is a cost of
shortage which is proportional to the quan-
tity and the time of delivery.
Models for probabilistic demand
The probabilistic inventory problems include
the cases of constant demand with probabil-
istic lead time, probabilistic demand with
constant lead time, and probabilistic demand
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with probabilistic lead time. There are sev-
eral inventory policies for items with prob-
abilistic demand that are well documented in
the literature (Peterson and Silver, 1979).
Among the continuous review policies which
suit the computerised inventory systems, the
(s, S) is our policy of choice which is
frequently used in practice (Archibald and
Silver, 1978) (whenever inventory reaches s
or lower, inventory is topped up to level S).
The computational details of implementing
this model in the expert system can be found
in Liang (1997).
Models for items with linear demand
Mitra's method (Mitra et al., 1984) for items
with linear demand has been selected in this
study. It has several advantages, including its
straightforward procedure and the feature
that replenishments are made at equal inter-
vals makes the model much easier to admin-
ister.
This method is equally applicable to the
negative trend where analytical methods are
not presently available and can be smoothly
transferred from linear demand to steady
demand to deal with the cases where the
demand may become steady after a period of
increase (or decrease). Moreover this model
can be used to estimate the exact amount to
cover the demand over a period to deal with
the items with negative trends in demand
which will not be stored after a certain
period.
The procedure presented by Mitra et al.
(1984) modifies the EOQ model to accommo-
date the special cases of increasing and
decreasing linear demand patterns. Details of
model implementation in the expert system
can found in Liang (1997).
Models for seasonal demand
For the cases of seasonal variation based on
constant basic demand, the seasonal demand
can be described as a time-independent con-
stant rate plus a time-dependent seasonal
movement. If a year is divided into equal
intervals according to the length of season,
then the demand over each interval equals
the sum of the constant demand and seasonal
movement over the interval. This converts
the problem into deterministic time-varying
demand inventory problems which can be
solved using Silver and Meal's (1973) heur-
istic. This heuristic can also cope with the
future fluctuation of demand in each period
within the planning horizon (in fact, this
heuristic does need an ending point). In
addition, the use of Silver and Meal's heur-
istic can result in a low average cost penalty
of around 0.4 per cent compared with the
optimal algorithm(Tuite and Anderson, 1968).
For the cases of seasonal variation based
on a linear trend demand, the demand
consists of a basic linear trend and seasonal
movement. Thus the replenishment decision
is made following two stages. First, to decide
the replenishment interval T of the basic
component as the basis of reorder interval;
then add the seasonal movement for this
interval. Thus the problem can be solved by
deciding the replenishment quantity for each
demand component, i.e. the basic component
with linear trend and the seasonal movement
component during the interval. The first
component can be determined by Mitra et
al.'s (1984) model. The seasonal movement
(Q
s
) within replenishment quantity can be
decided in terms of the length of replenish-
ment interval T and the length of season l. If
T/l is an integer, the seasonal movement is
Figure 5
Model tree of constant demand inventories
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management system
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10/6 [1999] 354366
Q
s
=
T
l
i=1
s
i
.
If T,l is not an integer, then it is divided into
an integer n and a fraction c,
T,l = n c
and the seasonal movement is decided by
Q
s
=
n
i=1
s
i
c s
i1
.
Models for low demand items
For the low demand items, the (s, s + 1) policy
is adopted, which is a special case of (s, S)
policy with S = s + 1 or Q = 1. Therefore, the
only decision parameter which needs to be
estimated is the reorder point (s) which is
calculated in a similar way to items with
stochastic demand patterns (Liang, 1997).
It has been claimed that in theory the (s,S)
policy provides the best management of low
and intermittent demand items. However,
Sani and Kingsman (1997) have shown, based
on practical study, that a company may use
any of the inventory models, as none has
proved to be more successful than the others.
Results
The system was developed by using Visual
Basic which is a complete event-driven
programming language that supports the
structured programming constructs found in
most other modern programming languages.
The Visual Basic programming system
allows users to create applications that fully
exploit the graphical user interface (GUI) and
the key features of Microsoft Windows,
including multiple-document interface
(MDI), object linking and embedding (OLE),
dynamic data exchange (DDE), graphics, etc.
Visual Basic can also be extended by adding
custom controls and by calling procedures in
dynamic-link libraries (DLL). The system
development started with the production of
the proposed design, shown in Figure 1, and
the design of the application form or main
menu (Figure 2) which controls the execution
of the data manager, pattern identifier, order
decision, and help facilities. The system was
developed as several self-contained executa-
ble modules.
The system verification, which ensures
that the software correctly implements a
specific function, was carried out using unit
testing while the system was developed and
integration testing after the system
programming was completed (Liang, 1997). In
what follows, we discuss sample results from
the system using spare parts inventory data
supplied by a high-tech manufacturer of
optical fibres and an airline. The data
supplied by the manufacturing company
contained up to three years' data of over 2,000
spare part items and the airline data con-
tained 24 months' data for around 16,000
items.
Demand analysis
The demand data file is updated by adding
new demand data into the file and shifting
the oldest demand data out of the file, so that
the analysis results can reflect the recent
demand situation. If the analysis results
show that an item's current demand pattern
has changed, then a different inventory
model will be automatically selected by the
rule base to deal with the new situation. The
impact of the length of history data on
pattern identification is discussed later.
The Appendix shows demand data of five
inventory items used as spare parts in the
manufacturing company. Table I shows the
analysis process of these demand data. At
each stage of the testing process, both the
statistic and critical values for different
statistical methods are given by the system.
This would explain to the user why the test
hypothesis was rejected or accepted and how
the analysis results were achieved. The last
row of each column contains the final
analysis result of each item.
The system can carry out the demand
analysis of a large file in a short time period,
which allows the user to repeat the analysis
or experiment. For example, a data file of
10,000 items can be analysed in less than nine
minutes on a 66MHz 486 PC with 16MB RAM.
Using simulation to evaluate the impact of
the system's ordering decisions on inventory
cost, Liang (1997) has shown that for a sample
of 24 items, the cost savings are significant
(around 23 per cent). Obviously, such savings
will depend on the type of inventory and the
management policies employed, but none-
theless this figure points at the potential
saving that can be achieved as a result of
employing the proposed system.
Sensitivity analysis of pattern
identification process
Table II shows the percentage of items with
each demand pattern identified for two large
inventory data files provided by an airline.
The analysis has shown that for the shorter
period file, about one-third of the items are
classified as having unpredictable demand
and hence cannot be modelled. On the other
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management system
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10/6 [1999] 354366
hand, more than half the items in the longer
period file were classified as low demand
items. It is obvious that the length of history
data used in the analysis will affect the
results and the selected patterns
To assess the effect of the length of period
of the used history data on pattern identifi-
cation, a sample of 10,000 items was studied.
The results were compared for using 15 and
18 months' of data with two sets of tests'
critical values.
Table III shows that when the length of
history is increased from 15 to 18 months, the
most significant change is an increase in the
number of low demand and quasi-constant
demand items and a drop in the number of
constant demand items. This change may be
specific to this particular data set and it can
be rather difficult to draw general conclu-
sions from this behaviour.
Of direct relevance here is the frequency
of running the demand pattern identification
module. Obviously, if we repeat this pattern
identification too frequently, there may be
frequent changes in the models used in
ordering which may lead to inconsistency
in decisions leading to higher inventory
costs. On the other hand, if the frequency
of updating the patterns was low, then
wrong models may be identified, which can
also lead to higher inventory costs. Deciding
on the frequency of running the pattern
identifier is an important research area
which is currently being studied. But the
system provides some tools, including the
partition of data into different sizes and the
calculation of the number of items which fall
in each category, which can help the user to
experiment with different history data
lengths.
Another important factor in running this
system efficiently, is the selection of the
significant levels associated with the statis-
tical tests used in pattern identification.
Table IV shows the impact of changing the
significance level for these tests. For exam-
ple, comparing cases one and two indicates
that a change of the significant level of the
trend test from 0.05 to 0.1 increases the
number of items identified in this category
by 42 per cent. Comparing cases two and
three indicates that reducing the upper limit
of low demand from six to five per year has
no significant influence on the number of
items identified in this category. In general,
within the reasonable range of significant
levels variations shown in Table IV, there
is only minor variation in the number of
items identified as having a low demand or
unpredictable demand pattern.
Table I
Process of demand analysis (based on the data shown in the Appendix)
Item
Test A B C D E
Seasonal C = 7.81 C = 7.81 C = 19.68 C = 19.68 C = 19.68
T = 2.83 T = 0.71 T = 11.0 T = 10.19 T = 10.62
R: Reject R: Reject R: Reject R: Reject R: Reject
Trend C = 1.34 C = 2.23 C = 1.32 C = 1.32 C = 1.32
T = 1.06 T = 0.73 T = 0.15 T = 0.71 T = 0.69
R: Reject R: Reject R: Reject R: Reject R: Reject
Randomness C = 1.28 C = 1.28 C = 1.28 C = 1.28 C = 1.28
T = 0.39 T = 2.27 T = 0.67 T = 4.87 T = 2.35
R: Accept R: Reject R: Accept R: Reject R: Reject
Normal distribution C = 0.29 C = 0.25
T = 46.94 T = 1.91
R: Reject R: Reject
Poisson distribution C = 11.07 C = 16.92
T = T = 4.02
R: Reject R: Accept
Empirical distribution R: Accept
Strictly constant C = 0.5 C = 0.5 C = 0.5
T = 0.28 T = 1.61 T = 17.94
R: Accept R: Reject R: Reject
Quasi-constant C = 1.9 C = 1.9
T = 1.61 T = 17.94
R: Accept R: Reject
Unpredictable pattern R: Accept
Notes: C = the critical value; T = the value of the statistic; R = the result of the statistical test
[ 363]
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management system
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10/6 [1999] 354366
Conclusions
Generally, practitioners in OR have used
classical mathematical approaches for mod-
elling and decision making. These provide a
firm theoretical foundation and often lead to
optimal solutions. However, real-world pro-
blems are often too vague, too ill-structured,
or too complex for formal mathematical
modelling (Kastner, 1984). The complex nat-
ure of the problems encountered today in
business and industry, and the competitive
environment in which they exist, requires
the processing of increasing volumes of data
in increasingly complex, innovative and
efficient ways (Muhanna and Pick, 1994).
Table IV
The impact of different significance levels (or critical values) on the results of pattern
identification
Patterns
Low
demand Seasonal
Strictly
cons.
Quasi-
cons. Trend Normal Poisson Empirical
Unpred-
ictable
Case 1 Critical value a<7 0.05 o<1.0 o<0.5 0.05 0.05 0.05 0.05
No. of items 5,229 0 1,004 1,101 1,385 0 487 362 441
No. of items 5,229 0 808 966 1,968 0 300 301 428
No. of items 5,176 0 0 2,350 1,392 0 483 362 441
No. of items 5,176 0 0 2,146 1,392 0 483 362 237
No. of items 5,176 0 844 966 1,984 0 301 301 428
No. of items 5,176 0 0 1,810 1,984 0 301 301 428
Notes: a = annual demand; o = standard deviation
Table III
The impact of the sample size on the results of pattern identification
Patterns
Low
demand Seasonal
Strictly
cons.
Quasi-
cons. Trend Normal Poisson Empirical
Unpred-
ictable
Sample size Critical value a < 7 0.05 o < 1.0 o < 1.5 0.05 0.05 0.05 0.05
15 months No. of items 3,881 0 3,337 767 592 0 724 432 267
18 months No. of items 4,391 0 2,511 922 690 0 723 485 278
Change 490 0 826 55 98 0 1 53 11
Critical value a < 7 0.1 o < 1.0 o < 0.5 0.1 0.1 0.1 0.1
15 months No. of items 3,881 0 3,244 619 1,324 0 534 383 277
18 months Critical value 4,391 0 2,247 831 1,340 0 457 382 351
Change 510 0 997 212 16 0 74 1 74
Notes: a = annual demand; o = standard deviation
Table II
Classification of items' demand patterns for two large data files (percentages)
Pattern
Data file Low demand Seasonal Trend Probabilistic Constant Unpredictable
File 1
24 months
15,731 items 52 0.0 14 8.4 22 3.6
File 2
12 months
5,000 items 24.3 0.0 0.002 12.1 32.2 31.4
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management system
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10/6 [1999] 354366
Recent advances in MS/OR and ES techni-
ques provide tools enabling this need to be
addressed. Consequently there has been a
marked advance in the use of KBS to support
management decision making in different
areas of business and industry. This paper
has described a knowledge-based inventory
management system which is able to obtain
history data from existing inventory data-
bases, identify demand patterns based on
these data, and help inventory managers
in making decisions using mathematical
inventory models selected from the model
base using the rule base based on the results
of data analysis and the characteristics of the
practical situation in hand. It is hoped that
the system would promote the applications of
published inventory models, and help inven-
tory managers to achieve efficient and effec-
tive performance of inventory management.
The development of a prototype KBS
embodying these concepts has been described
and some results from its application to real
inventory history data have been discussed.
The approach was found to be very useful
and to have a great deal of further potential
in practical applications, especially in the
classification and choice of models. This can
be a valuable achievement as inventory
problems are common to all business and
industry sectors from retailers to manufac-
turers.
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[ 365]
Yansong Liang
management system
Systems
10/6 [1999] 354366
Appendix
Table AI
Demand data for spare parts
Item
Period A B C D E
1 59 80 6 12 50
2 80 80 11 5 25
3 79 80 4 5 70
4 80 79 10 5 80
5 20 80 8 5 25
6 77 80 7 5 25
7 77 80 3 5 45
8 80 80 4 5 25
9 80 80 7 5 25
10 80 80 7 5 25
11 80 80 8 5 25
12 80 80 7 5 25
13 80 8 5 25
14 51 2 5 35
15 80 7 3 25
16 80 9 5 25
17 80 7 5 25
18 79 4 5 25
19 7 5 25
20 7 5 50
21 5 7 15
22 8 7 25
23 8 7 35
24 5 4 80
25 3 7 21
26 4 11 20
27 3 10 20
28 5 6 40
29 5 6 40
30 2 5 20
31 8
32 2
[ 366]
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management system
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10/6 [1999] 354366

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