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Computers ind. Engng Vol. 35, Nos 1-2, pp.

145-148, 1998



© 1998 Elsevier Science Ltd. All rights reserved
Printed in Great Britain
0360-8352198 $19.00 + 0.00

A Multi-Echelon Inventory System with Returns
Aybek Korugan and Surendra M. Gupta t
(t correspondingauthor)
Laboratory for Responsible Manufacturing
334 Snell, Department of MIME
Northeastern University
360 Huntington Avenue
Boston, MA 02115, U.S.A.
This paper considers a two-echelon inventory system with return flows, where demand and
return rates are mutually independent. An open queueing network with finite buffers is used to
model this system. The model is analysed using the expansion methodology.
© 1998 Elsevier Science Ltd. All rights reserved.

As a consequence of environmental necessities, reuse of products has recently become a key
issue for production and planning. Many companies are involved in retrieving used products
where they repair, refurbish and upgrade the products in order to sell them for profit. Production
systems of this type use both the returned products as well as new items as the raw material
for the products they sell. Since traditional inventory models do not take returns into account,
they are not adequate to address such systems. Therefore, new inventory models are needed to
minimize total inventory costs.
A system with mutually independent demand and return rates was first modeled using an

M / M / 1 / N queue by Heyman [1]. The objective was to determine the optimal keep level N
that minimized the total inventory cost. The model did not consider the lead times. A latter
paper by Muckstadt and Isaac [9] considered lead times but ignored the disposal activity, when
exploring a continuous (Q, r) policy inventory model. The results obtained on the single-echelon
model were applied to a multi-echelon model. Laan et. al. [8] added the disposal option to the
single-echelon model in [9]. Their study included a comparison between inventory policies with
and without disposal that showed disposal is a necessary action for cost minimization. Laan et.
al. [7] compared several inventory control policies with disposal option and showed that a fourparameter control policy was optimal. Laan et. al. [6] showed that the pull control strategy was
more cost effective than the push control strategy for inventory systems with return flows. A
further study by Laan and Salomon [5] verified these results while adding the disposal option to
the earlier model. A more detailed overview of such systems is given by Salomon et. al. [10].
In this paper, we consider a supply system that satisfies customer demands through direct
sales and allows returns. The returned items are first collected by the retailers and then sent
to the warehouse to be remanufactured. At the warehouse, the returned items are kept in the
recoverable item inventory until they are remanufactured. After the remanufacturing process, the
items are assumed to be restored into 'as good as new' condition and placed in the serviceable
item inventory to satisfy the demand from customers. The return rate is assumed to be smaller
than the demand rate. The difference is produced at the facility.

In such a case. In addition to the disposals. (b) The queueing network model The performance parameters of the inventory control problem are approximated using the parameters of the queueing network. the buffer of node 1. . S(t). The recoverable item inventory of the retailer Rr(t) is given by the number of items at node 1. Other processes observed for their impact on the total cost are disposal. which is defined as the demand rate minus the return rate. K2 and K3. = Pt It~ P3 1 2 a node1: Vat. the buffer of node two is the recoverable item inventory of the warehouse. two and three. Rw(t) = L2(t). transportation times are represented by the service time of node one. that is Rr(t) = Li(t). The sizes of each of the buffers. (i = 1 . ~ u ~ / S: Set-vteab~ Irma ~v~ttw~ DS: 131~t~al of Items (b) Figure 1: (a) Echelons of the Problem. (for retailer i. In an effort to control such instances. as we consider transportation and remanufacturing costs. is defined by the throughput of node 4 as TH4(t). respectively. we allow returned items to be disposed off from recoverable inventory at a fixed disposal cost per disposed item. Here. The on-hand inventory of the serviceable items at node 3 is O(t) = L3(t). one. To this end we assume. MODEL DESCRIPTION We consider a two-echelon inventory system of the type shown in Figure 1 (a). The departures are the demands satisfied by the warehouse. Other incurred costs are holding costs. DS(t). The procurement of new products. Hence. the buffer of node one is the recoverable item inventory of the retailer and the activity represents the transportation of returned products from the retailer to the warehouse. Similarly. are approximated by the throughputs THz (t) and TH2(t) of nodes 1 and 2 respectively. which is exponentially distributed with rate Pt. Disposal occurs when the recoverable item inventory. For this study. while the activity represents the remanufacturing process with exponential rate Prin. . determine the maximum number of items its corresponding inventory is allowed to hold and are represented as K1. Also. That amounts to the rejected portion of the arrival process A(t).23rd International Conference on Computers and Industrial Engineering 146 As both demand and return rates are probabilistic. remanufacturing costs. #3 = A and the buffer represents the serviceable item inventory of the warehouse. there is a chance that the on hand inventories exceed the predefined limits. The fourth node of the network models the manufacturing of new items. and remanufacturing process. we assume that the disposals take place only at the lower echelon. Hence. Note that the demand cannot be satisfied when the buffer of node 3 is empty. Similarly. the demand is considered lost. We are only interested in the output of this node. The third node models the demand process. . that there exists only one retailer that has 7c ~'-~N=I~ci as return rate. We approach the described problem by modeling it as an open queueing network with finite buffers. The demand and return are Poisson distributed with rates )~ and %~. we reduce the problem to the queueing network given in Figure l(b). Similarly. manufacturing costs and transportation costs. N)). Zt(t). Zrm(t). the recoverable item inventory of the warehouse is represented by node 2. . is full. By imposing this assumption. respectively. the lost sales is given by . and lost sales. P(t). we also take lost sales into account. the outputs of transportation process.priSon of ~ovm~ I/7/4 n0~3: ~ p~¢~ ~4: p~i~ 0f~ ~a R: Recovm'abk item i . without loss of generality.

3. which occurs when the buffer of node three is zero.1. Then the total expected inventory cost is: C = lira T--+oo 1/T [hlRr(t)+h2Rw(t)+h30(t)+dDS(t)+S(t)l+Zt(t)ct+Zrm(t)Crm+P(t)cm]dt (1) Using the queueing network model. 10. Then the changes in manufacturing. the effects of higher return and demand rates on the total cost function are tested (exp. 3. (d) Experiment 11 RESULTS AND CONCLUSIONS The results of the experiments show that in the predefined subspace. C = 26. hi. remanufacturing and disposal costs respectively. (c) Experiment 5. transportation.23rd International Conferenceon Computersand Industrial Engineering 147 the unfulfilled portion of the demand process D(t). 3}. 3}. 3).K1 + ID(t)p3. 3}. ANALYSIS A N D E X P E R I M E N T A T I O N We use the 'expansion methodology' [2. the cost function is monotonically increasing for the inventory at retailer and for the recoverable item inventory of the warehouse. am. In experiment 5 the system is observed for arbitrarily high disposal costs. ct. Crm and d be holding. 2. 11). This observation is also valid for the serviceable item inventory of the warehouse in five of the 11 experiments including the first experiment depicted in Fig. (b) Experiment 2. K~. The sensitivity analysis is conducted relative to the first experiment. 1. 8. 9. we developed a computer code that calculates the total expected cost for all the points in a predetermined subspace of {K1.1}.51 (b) {1. remanufacturing and transportation costs are tested (exp. 2(a). KJ. C can be approximated as follows: C -- 1// T~oolim~ [hiLl(t) + h2L2(t) + h3L+(t) + dA(t)pl. 6. )) 30 2! 2 (a) {1.71 Figure 2: Cost function graphs with local optimum points {K~. was obtained for each experiment (Table 1). K3}. 2(b)) was tested and the system tended to increase both . 1. we assumed that ct + Crm < Cm + d [1].0 +THl(t)ct + TH2(t)Crm + TH4(t)cm]dt (2) Note that Pi.49 (c) {9. In experiment 2. the response of the system for a large lost sales cost (see Fig. (a) Experiment 1. First the effect of high lost sales cost is analyzed (exp. C = 27. With the help of this code we can determine the local optimal values {K~. for most cases. lost sales. 4). 2.j is the probability that the buffer size at node i is equal to j. K2. while constructing the experimental data. Finally. 7). manufacturing. The next two experiments are conducted to create a bias towards a chosen inventory (exp. C = 48. Note that. C=15. (i = 1. We have conducted several experiments to test the sensitivity of the optimal values to various system parameters. Let. 4] to analyse the queueing network model. The rest of the experiments had concave cost functions for K3 and the local minimum value. In order to observe the effect of the system parameters on the cost function. The experiments and their results are given in Table 1. K~} and C*. K~. 2). K~} and C* for four typical cases.70 (d) {1. l.

Heyman.5 1.18 18. and Salomon M.n cm d l lit prm pS 7c K~ K~ K~ C* 2 2 2 2 2 10 2 2 2 2 2 2 2 2 2 2 2 5 2 2 2 2 4 4 4 4 4 4 8 4 4 4 4 2 2 5 5 2 2 2 2 2 2 2 3 3 5 7 3 3 3 3 3 3 3 6 6 15 10 6 6 6 6 6 6 6 3 3 5 1 50 3 3 3 3 3 3 4 30 10 5 28 4 4 4 4 4 4 1 1 1 1 1 1 1 1...25 1.5 1. 1996. 1994.2 1 1.25 1.5 0. Erasmus University... Dekker R. 1981. [4] L. and Ridder A.5 1. and Wassenhove L. Naval Logistics Quarterly.25 1.25 1. Technical Report ERASM Management Report Series. [5] E.71 Table 1: Various experiments and their results recoverable and serviceable inventory levels of the warehouse. Kavusturucu and Gupta S. REFERENCES [1] D. A. 46-47:339350.25 1. 1996. [10] M. arbitrary topology and finite buffers.62 26. H. this means that remanufacturing of used products may have a positive effect in overall cost reductions for production systems.5 0. where the impact of an arbitrarily large disposal cost and a correspondingly large lost sales cost were measured. Salomon M.. We also observed that higher return rates resulted in lower holding costs. Thierry M. A.96 48.51 26.25 1. Computers and Operations Research. Optimal disposal policies for a single-item inventory system with returns. Rotterdam. Dekker R.35 1.. ..35 1. An (s.25 1.5 1. Kavusturucu and Gupta S.25 1. Laan van der.25 1.35 1. [8] E. Rotterdam. to appear in International Journal of Production Economics. and Ridder A.5 0. A. the serviceable inventory tended to increase in order to dampen the impact of lost sales. Product remanufacturing and disposal: A numerical comparison of alternative control strategies. International Journal of Production Economics. Laan van der and Salomon M. Manufacturing systems with machine vacations.5 1. 1998.35 1. while a low disposal cost encouraged the system to hold the minimum possible inventory. [3] A. A.5 0. Dekker R.42 14. An analysis of single item inventory systems with returns. P. Laan van der. MacGregor. 1996.5 1 1. [7] E.49 31. Obviously. Kerbache and Smith J. 28:385-405.25 1. A.5 1.95 14. Naval Research Logistics Quarterly. Asymptotic behavior of the expansion method for open finite queueing networks. Muckstadt and Isaac M. M. When we tested the effect of high demands. 1997.. Erasmus University. Laan van der. 24:385-405. Laan van der E.5 0. A.39 23. Production planning and inventory control in hybrid systems with remanufacturing. M.23rd International Conference on Computers and Industrial Engineering 148 exp 1 2 3 4 5 6 7 8 9 10 11 hi h2 ha ct cr. Salomon M. Production planning and inventory control with remanufacturing and disposal. Moderate changes in holding costs did not effect the decision parameters even though they caused fluctuations in the total cost. [6] E. [2] A. the cost was asymptotical to the retailer inventory within the observed subspace (see Fig. 172.5 3 6 0.83 27. Product remanufacturing and its effects on production and inventory control. to appear in Production Planning and Control.25 1. Q) inventory model with remanufacturing and disposal. Technical Report. International Journal of Production Economics. N.5 1. A.5 1. In experiment 5. 2(c)). 1977. Technical Report. 1998. Dekker R.5 0.70 18. 15(2):157-169. 45:489-498. Erasmus University. 1988. Rotterdam. Salomon.2 1 1 1 1 9 1 1 1 1 1 1 1 2 1 1 1 1 1 1 1 1 1 1 3 2 1 3 1 1 1 1 2 3 15. A significant increase in manufacturing costs forced a slight increase in the serviceable inventory. [9] J. Tandem manufacturing systems with machine vacations.