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You are on page 1of 4

Jie Wan

School of management

Hebei University of Technology

Tianjin, China

E-mail: jeanwan1218@hotmail.com

Hongyan Chen

School of Liter and law

AbstractWe consider the simulation of constrained

optimization problem, the (s, S) inventory system with stochastic

lead time and a service level constraint. We allow the orders to

cross in time which makes the problem more complicated. We

establish the (s, S) inventory model by using Arean and find the

estimators by OptQuest. We try to solve several issues: 1) what

the true optimal values of (s, S) are in this specified conditions; 2)

whether the OptQuest can find the optimal values; 3) how we can

prove the outcomes are the estimators of true optimal values. In

our conclusion, we give the true optimal estimator of (s*, S*)

pairs estimated by Brute Force. Further, we prove that OptQuest

can be used in solving the stochastic constrained optimization

problem effectively. By testing estimators KKT conditions under

the method of Bettonvil [16], we prove that we can find the good

estimator of (s*, S*).

Keyword-simulation, (s, S) inventory systems; KKT test for

multiresponse

I.

INTRODUCTION

testing of Krush-Kuhn-Tucker (KKT) optimality conditions for

the computation of (s, S) values, which minimize expected

costs with a service constraint. The system considered here has

a single item and a major assumption same as Bashyam and Fu

[1] is that orders are not received in the same sequence as they

placed which complicated the analysis.

Many approaches have been taken to compute optimal or

near-optimal inventory levels for the (s, S) inventory system

with different environment of interests. Some literatures treat

the inventory system as a white box; i.e., built a mathematical

model and examine it to get an exact, analytical solution to see

how it can be used to answer the questions. Examples of these

studies include: Archibald [2], Ehrhardt [3], Porteus [4],

Freeland and Porteus [5], Tijms and Groenevelt[6], and

Federgruen and Zipkin [7], Hu [8], Fu and Hu [9].

When some analytical solutions become extraordinarily

complex, some methods treat the inventory system as a black

box; study it by means of simulation. Some of these

Tianjin, China

e-mail:chenhongy@eyou.com

Li Li

School of management

Hebei University of Technology

Tianjin, China

E-mail: lili214@eyoul.com

optimization methods assume that no gradient information

is available. Examples are the many metaheuristics (ant colony

optimization, genetic and evolutionary algorithms, scatter

search, simulated annealing, and tabu search), simultaneous

perturbation stochastic approximation ([10]), and Response

Surface Methodology (RSM). Other methods estimate the

gradients from a single simulation runbest known are

perturbation analysis and the score function method.

Although there are a huge body of literature that has been

developed on searching the optimal value of s and S, the

literature on constrained optimization is more sparse. A review

of a large number of optimal and approximately optimal

algorithms to carry out this unconstrained optimization can be

found in [11]. However, even in the unconstrained problem, in

order to achieve some degree of tractability, almost all

analytical models have assumed that lead times for orders do

not cross in time. This assumption is not always being hold in

the real world when the lead-time is random. More and more

people tend to replace penalty cost by service level measures in

practise, which makes the problem becoming unconstrained

one. Unfortunately, it is still difficult to define the distribution

of backlogged demand in an analytical viewpoint. A review of

the literature shows that there are two most relevant works:

Bashyam and Fu [1] and Angun [12]. The former adopt a

simulation-based approach to the problem. The latter illustrate

their heuristic by applying it to the optimization of an (s, S)

inventory system.

We test the KKT conditions in statistical method. Gill [13]

presents the KKT first-order optimality conditions in

deterministic

nonlinear

mathematical

programming.

Karaesman [14] presents an unconstrained optimization

algorithm to check the KKT conditions for a single stochastic

response. They used the estimated gradient of the goal

function. To check KKT conditions in multiple responses,

Angun [15] and Bettonvil[16] derive procedures. The former

proposes an asymptotic statistical procedure with a large

sample size, while the latter solves the same issue by assuming

small number of replications per scenario.

Foundation of Hebei Province (no. 200607023)

6553

II.

ARENA MODEL

We consider an infinite horizon continuous review

inventory system with continuous-valued i.i.d. (independent

and identical distribution) demands and full backlogging for a

single item. The model established by Arena describes the

sequence of events in any period: demand, review, order and

delivery. The details can be stated as follows: At the beginning

of the period, the demand is arriving; Fulfill the demand if onhand inventory; any unfilled demand in a period is entirely

backlogged. The arrived products are first used to fulfill the

backorders happened during lead times before they are used to

replenish the on hand inventory. (See Fig1)

The performance of the system will be evaluated by a cost

function and a service level measure, where the measure of cost

considers only the setup and holding costs. Note that, instead of

a shortage cost, we shall consider a stock-out constraint, which

is defined as the fraction of total demand that is not satisfied

from on hand stock. The lack of the fill-rate measure

considered in [6], referred to as service level, given by,

total numberof backorder

(1)

= E

total numberof demand

OptQuest, from OptTek System Inc, uses heuristics known

as tabu search, neural networks, and scatter search into a single,

composite search algorithm to move around intelligently in the

input-control space and try to converge quickly and reliably to

an optimal point [17].

After the establishing of Arena model, the OptQuest takes

over the execution of the Arena model. Once the optimization

problem is described by means of selecting controls (inputs),

the objective, and possibly imposing constraints and

requirements (can be done easily by using OptQuest

configuration screens), Arena is called every time a different

used by OptQuest evaluates the responses from the current

simulation run, analyzes and integrates these with responses

from previous simulation runs, and determines a new set of

values for the controls, which are then evaluated by running the

Arena model. This is an iterative process that generates new

sets of values for the controls, not all of them improving. The

process continues until some termination criterion is satisfied.

III.

EXPERIMENT OUTCOMES

First, we apply the brute force method to get our true optimal

estimator of (s*, S*) by following the procedure:

Step1: simulated the case for 30000 periods with the costs

and the service level 10 replications over (s, S) plane,

where 0 s 3000 and 0 S 3000 . We increased each time

both s and S by 100 and keep the constraint S s . After

evaluating 325 combinations of (s, S), we concluded that an

estimate of (s*, S*) is restricted to 900 s 1250

and1050 S 1250.

and increased both s and S this time by 10( << 100 ) and

keep S s . After evaluating 546 combinations, we gained the

more restricted range 1010 s 1030 and 1070 S 1090 .

Step 3, because we consider the integer input, there are

441(=21*21) combinations for the secondary area.

Our conclusion is that some combinations in this area could

be estimator of (s*, S*); the average service level is from

0.0999 to 0.1001 and the average total cost is from 623.739 to

625.514 (See TABLE 1). When s is 1020 and S is 1075, the

corresponding average total cost estimator is 623.739 and

service level is 0.1001, with standard deviation 2.3577 and

0.004298, respectively. We call it the best true estimator of (s*,

S*).

To estimate the optimal value of (s*, S*) in QptQuest, we

first search the area where 0 s 3000 and 0 S 3000 with

the suggested value 1000 for both s and S and 30,000 periods

with 10 replications. And we give the automatic stop rule as

stopping after 300 non-improving solutions. It took about 3

hours to find the best solution (996, 1116) so far, which is

called coarse solution, under this specified condition. Then we

search the more restricted area 800 s 1200 and

800 S 1200 with the suggestion values for s, S, 996 and

1116 respectively. After around 150 minutes, the simulation

stopped with the solution s is 1021 and S is 1077, the

corresponding average total cost is 624.869 (Std. Dev. =

3.7885), feasible Requirement: service level is 0.1002 (S.

D = 0.005001). See TABLE 1.

6554

ALGORITHMS

Optimization Method

Brute force

OptQuest

Denoted as

(s, S)

cost

S.D. of cost

Service Level

S.D. of Service Level

A

(1020,1075)

623.739

2.3577

0.1001

0.004298

B

(1021,1077)

624.869

3.7885

0.1002

0.005001

obtained by Brute-force is about 1. Note that this search

process depends on the size of search area and the original

suggestion value closely. In the following section, we try to

prove our outcomes are the estimators for (s*, S*).

IV.

KKT TESTING

according to the [16] in order to follow their KKT testing

procedures. We let d j denote the control variable (non-

k = 2 inputs: the reorder point s and order-up-to point S. The

responses can be described as Wh (h = 1, , z 1) , which z is

the number of response, here equal to 2. The objective output is

to minimize the average total cost, denoted as W0 , and

described as following:

E (W 0 (d, r ))

Minimize

Subject

to

E (W1 (d, r )) 0 .1

(2)

the service level with right-hand-side is 0.1. Our model

has two inputs and two outcomes, so it falls into the

constrained, nonlinear, random multiresponses optimization

problem.

The KKT conditions for deterministic problem can be

shown as

0:0 = B 0:J

(3)

the k J matrix with the gradients of the J binding

where

Langrange multipliers. In our model the B 0:J can be

expressed as B 0:1 , a 2 1 matrix.

labeled as A, B. Following the testing procedure in [16], we

first design experiments by using the most popular design,

CCD, which consists of a Resolution-5 (R-5) design, the 2k

axial points, and the centre point. We realize that this procedure

could be influenced deeply by the local area. In order to reduce

the effects of the local area size on the final results, we

experiment with three types of situations to obtain the other 4

points of R-5 design: they are found by (arbitrarily) changing

the coordinates of the central points by 2, about 0.25 %; by 5,

about 0. 5 %, and by 10, about 1 %.

polynomial by

h' = X T X

where

(4)

X T Wh '

test, calculated by the following formula,

m (W

(h ) =

(W

n

Fn q , N n

i =1

'

mi

i =1

r =1

i , h'

i ,h ' , r

y i ,h ' ) 2 / (n q )

W i ,h

'

/ (N n)

(5)

replications per design point, n(n = 1,2, ,9) denotes the

number of design points and N is the total number of

replications for all design points, which equal to

m1 + m2 + + mn = 8 + 3 = 11 . y ' = X ' denotes the vector

i,h

According to [16], we need to test three null-hypotheses

obtained from the optimality conditions of KKT as follows:

(i) Test whether the current solution is feasible and whether

the constraint is binding. By testing the representative centre

point of the current local area, we test the following nullhypothesis,

~

H 0(1) : E W1 d = 0 = 0.1

(6)

( (

))

~

W d = 0 0.1

t m 1 = 1

h / m

,

(7)

replicated simulation outputs at the centre point of CCD, and

h is the pure error standard deviation following from

Equation 6.

(ii) Test the null-hypothesis which generated by replacing

all deterministic quantities in the original KKT conditions by

their (random) estimators; i.e.

( ) (

(8)

()

H0(3) : E 0

(9)

500 macro-replicates of our experiment. In order to compare

the effects of different noisy on the outcomes, we repeated the

simulations with 3,000 periods and 30,000 periods, which

determine the resulting noise, respectively. We select the

probability of type-I error rate = 0.1 , the observed value is

denoted by , which is binomially distributed. Identifying the

6555

described as follows:

[2]

1). The point A (1020, 1075) has the best fit for most of test

conditions. Its test procedure rejects the null-hypothesis (6), (8)

and (9) with the probability of type-I error rate less than

0.1. It can be called the true approximately optimal point in

both local area 10 and 20.

[3]

very close to the optimum. Its procedure accepts the nullhypothesis in (6) implying a binding constraint and the nullhypothesis (8) with the probability less than 0.1 and (9)

with the probability slightly greater than 0.1 when the local

area is small. But as we know, we select = 0.1 arbitrarily by

considering conservative Bonferroni inequality, it can be

accepted as the optimal one when we ignore it.

3). The different noisy doesnt seem making obvious

difference for the outcomes under this specific case.

V.

[4]

[5]

[6]

[7]

[8]

[9]

inventory policy with random lead times and a service level

constraint by using Arena. OptQuest is used for the

computation of (s, S) values. We apply the statistical testing

procedure of KKT optimality conditions into our results. Our

outcomes show that OptQuest can be used in solving the

stochastic constrained optimization problem and find the near

optimum effectively.

[10]

[1] and Anguns. Also want to investigate the optimum through

white box methods. We have great interest on the searching of

robust solution for (s, S) inventory system by using OptQuest

and Arena. We try to derive values for the controllable factors

when making a strategic decision about (s, S) inventory

policyaccounting for the randomness of the environmental

factors.

[13]

REFERENCES

[1]

[11]

[12]

[14]

[15]

[16]

Discrete Compound Passion Demand, Management Science, 24, 1978,

pp 899-909

Ehrhardt, R., The Power Approximation for Computing (s, S) Inventory

Policies, Management Science. 25, 1979, pp 777-786

Porteus E. L., Numerical Comparisons of Inventory Policies for

Periodic Review Systems, Operations Research, Vol 33, No 1, 1985,

pp.134 -152

Freeland J. R. and Porteus E. L., Evaluating the effectiveness of a new

method for computing approximately optimal (s, S) inventory policies,

Operations Research, Vol.28. No. 2, March-April, 1980, pp. 353-364

H. C. Tijms and H. Groenevelt, Simple Approximations for the Reorder

Point in Periodic and Continuous Review (s, S) Inventory Systems with

Service Level Constraints, European journal of operational research,

17, 1984, pp. 175-190

Federgruen A. and Zipkin P, An Efficient Algorithm for Computing

Optimal (s, S) Policies, Operations Rresearch, Vol 32, No 6, 1984, pp.

1268-1285

Hu, J.Q., Nananuku, S., and Gong, W.B, A New Approach to (s, S)

Inventory Problems, Journal of Applied Probability, Vol. 30, 1994, pp.

898-912.

Fu, M.C. and and Hu J. Q., (s, S) Inventory Systems with Random Lead

Times: Harris Recurrence and Its Implications in Sensitivity and

Analysis, Probability in the Engineering and Information Sciences,

Vol.8, No.3, 1994, pp. 335-376

Spall J. C., Introduction to Stochastic Search and Optimization;

Estimation, Simulation, and Control, Wiley, Hoboken, New Jersey,

2003.

Porteus E. L., Stochastic Inventory Theory, D. Heyman, M. Sobel Eds.

Handbooks in Operations Research and Management Science, Vol. II:

stochastic models, North-Holland, NY,1988.

Angun, E., D. den Hertog, G. Grkan, and J.P.C. Kleijnen, Response

surface methodology with stochastic constrains for expensive

simulation, 2006, Working Paper (download from http:// center.kub.nl

/staff/kleijnen)

Gill, P. E., W. Murray, M. H. Wright, Practical Optimization, 12th

edition. Academic Press, London, 2000

Karaesman, I and G. van Ryzin, Overbooking with Substitutable

Inventory Classes, Operations Research, 52, No. 1, 2004, pp. 83-104.

Angun, E., and J.P.C. Kleijnen, An Asymptotic Test of Optimality

Conditions in Multiresponse Simulation-Based Optimization, Working

Paper, 2005

Bettonvil, B., E. del Castillo, J.P.C. Kleijnen, Statistical Testing of

Optimality

Conditions

in

Multiresponse

Simulation-based

Optimization, 2005, Working Paper (download from http://

center.kub.nl /staff/kleijnen)

with Random Lead Times and a Service Level Constraint, Management

Science, 44, no, 12, Part 2, 1998, pp. 243-256

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