Proceedings of the 2013 Industrial and Systems Engineering Research Conference

A. Krishnamurthy and W.K.V. Chan, eds.

EOQ-based Inventory Control Policies for Perishable Items:

The Case of Blood Plasma Inventory Management

Junfeng Ma, Ting Lei

Department of Industrial and Manufacturing Engineering
301C Engineering Units, University Park, PA 16802, USA

Gül E. Okudan, Ph.D.

School of Engineering Design
Department of Industrial and Manufacturing Engineering
213T Hammond Building, University Park, PA 16802, USA

Abstract
Blood plasma management receives increasing concerns as it is directly related to saving lives, as a shortage could
lead to high risk for overall healthcare management. Blood plasma inventory is hard to control because available
donors and patients change stochastically, and blood plasma is perishable. Adequate levels of plasma need to be
collected, processed and preserved, and not yield shortages or waste. In order to respond to this complex problem,
one of the issues to investigate is appropriate inventory control. The Economic Order Quantity (EOQ) model is one
of most powerful and flexible inventory control models. Several inventory control policies are derived from this
model. For example, the continuous and periodic review policies are the two most widely used policies. The
continuous review policy monitors inventory level continuously with accurate and on time inventory control, but the
monitor investment is high. Periodic review policy applies only periodical control of inventory but lowers
monitoring investment. In this paper, we compare applications of these inventory control policies for blood plasma
inventory management. We also quantify inventory threshold values based on the system risk.

Keywords
Blood Plasma Inventory Management, EOQ-based Inventory Control, Continuous Review Policy, Periodic Review
Policy

1. Introduction
Blood plasma, which makes up nearly half of the total blood volume, is the liquid component of blood and has a
high demand in medical use. Blood plasma inventory management is a serious problem for many blood banks as
they must maintain a sufficient supply of blood plasma and simultaneously satisfy stochastic demand by patients.
However, some of the characteristics of blood plasma make the inventory management more difficult than typical
industrial inventory management cases. For example, blood plasma deteriorates with time. This specific
characteristic adds penalties associated with maintenance of blood inventory. In addition, the demand for blood
plasma does not have a constant rate, the requests are stochastic and hence subject to variation as per patient volume,
which cannot be predicted accurately on a day-to-day basis.

An effective blood plasma inventory management system needs to maintain a minimal inventory level on hand as
well as contribute to lower blood plasma waste rates. Many previous studies focus on different types of inventory
policies which aim to maintain a balance between the optimal inventory level and the amount of out-of-date blood
wastage and the cost of overall inventory management. The economic order quantity (EOQ) model is one of the
most influential and flexible inventory control models used to calculate the optimal quantity kept by minimizing the
total holding and ordering inventory costs. Several inventory policies are derived from EOQ model to track the
inventory level, such as the continuous review policy and the periodic review policy.
 Ma, Lei and Okudan
Continuous inventory review, also known as perpetual review, involves counting and documenting inventory levels
continuously while periodic inventory review policy only tracks each item and updates inventory counts
periodically. Policies providing for each type of inventory review have their advantages and disadvantages. For
example, the continuous review policy permits real-time updates of inventory level with accurate accounting but
also involves a high cost of implementation while the periodic review policy reduces cost and time spent in
analyzing inventory counts, allowing more time for other aspects of inventory management. However, it may not
provide accurate inventory counts for large blood plasma inventory volume and thus cause high risk for the overall
inventory system.

Overall, only few published papers focused on blood plasma, and none focused on blood plasma supply chain in
depth; hence, this is our motivation. In this paper, we compare applications of these two inventory control policies in
blood plasma inventory management and analyze the total system risk versus the cost for both inventory
management policies statistically. The results of this paper will provide useful guidelines for blood plasma inventory
management.

2. Literature Review
Only little literature exists in this field focusing on blood plasma, and the amount that exists primarily focuses on
supply chain management. This is probably due to the fact that handling a plasma inventory might be perceived to
be less complicated than any other blood component’s inventory, bearing in mind the long shelf life of the product
[1]. Blood plasma is usually kept in freezing conditions, and it has an advantage over red blood cells in terms of
time, throughput and cost of processing [2]. Freezing blood plasma is a good way of maintaining a reasonable
inventory, but one still has to consider a 20-minute thawing time, which could be too long in an emergency situation
[3]. In practice, it is common to maintain a stock of 5-day thawed frozen plasma in anticipation of general and
emergency use [2].

Many authors focused on blood supply chain research, and applied variety of analysis methods. A large number of
papers could be classified into categories of simulation and statistical analysis. Others can be regarded as operations
research papers, and still some others concentrate on cost analysis [3].

Jagannathan and Sen [4] applied a simulation model to replicate the daily transactions in a typical blood bank. Their
results were then used to corroborate the results obtained from their theoretical model. Kopach et al. [5] constructed
a red blood cell inventory system with two demand rates (emergency and discretionary). Their main method was an
already existing queuing model, which could distinguish between urgent and non-urgent demand. They used
simulation to compare the efficiency of the model with current control techniques, using real data obtained from the
Canadian Blood Services. Rytila and Spens [6] aimed at increasing the efficiency in blood supply chains by means
of discrete event simulation. They stated that there existed a lack of work on computer simulations in blood supply
chains, while they suggested the use of simulation to make this complex supply chain more comprehensible and
efficient.

Brodheim and Prastacos [7] combined Markov chain modeling with statistical analysis. They developed a model
which was able to translate the demand for and usage of blood into availability and utilization as functions of a
regional blood center’s blood distribution policy and a hospital’s blood bank stock policy. Hemmelmayr et al. [8]
used integer programming in the problem of delivering blood products to Austrian Hospitals in a cost-effective
manner. They investigated whether switching from the current vendee-managed inventory setup to a vender-
managed inventory system would be beneficial. They also compared performance with an alternative solution
approach based on a variable neighborhood search.

Custer et al. [9] assessed the cost of the blood supply. They distinguished among four categories in direct blood
supply production costs: donor recruitment and selection, donation collection, donor screening and processing and
donation distribution. They calculated total and unit costs by means of a spreadsheet program. Rautonen [1]
performed a cost analysis of the blood supply chain in Finland. The blood service costs of the Finnish Red Cross and
the hospital costs are examined up to the point when the blood product is ready for transfusion. The analysis
revealed that the material costs are only 25% of Finnish Red Cross blood service costs. Rautonen’s suggestion was
 Ma, Lei and Okudan
to cut down blood-related costs by improving processes both at the hospitals and the Finnish Red Cross. The study
emphasized the importance of cooperation between the two in order to achieve better results.

The papers regarding cost analysis provide the relationship between blood supply chain and cost. However, one
weak point of these papers is that they used one type of blood supply chain and then investigated the cost according
to this supply chain. This does not fit the real world well. In practice, the cost should be constrained due to the
budget limitation, and multiple varieties of supply chain systems could exist. The supply chain management decision
should be informed by varying supply chain types given the cost constraints. Responding to these needs, our
proposed method aims to find the relationship between two existing inventory policies, monitoring labor cost, and
provide the adequate management advice based on cost limitations.

3. Methodology

We consider two significant different inventory policies: (1) continuous review policy, and (2) periodic review
policy. These two polices are derived from the EOQ (Economic Order Quantity) model, which is the classic model
of inventory management. EOQ model is one of the timing decision models answering questions of when and how
much to order. The general timing decision structure is shown in Fig. 1:

Timing Decisions

Intermittent-Time
Continuous Decisions
Decisions
One-time Decisions
Continuous Review Periodic Review
Systems Systems

· EOQ
· EOQ, EPQ
· (S,T) System
· (Q,R) System
· (s,S) System
· Base Stock
· Optional
· Two Bins
Replenishment

Figure 1. Structure of Timing Decisions [10]

The classic EOQ model includes two different equations: the order time equation and order quantity equation, as
listed below. These two equations relate to the conditions shown in Fig 2.
Optimum order quantity: √ (1)

Order time/duration: √ (2)

where: is setup or ordering cost per unit time

is steady demand per unit time

is holding cost per unit time [10]

 Ma, Lei and Okudan

Cost
Inventory
Order size
Total cost
Holding cost
Average

Order cost

Time Order quantity

(number of units)

Figure 2. EOQ Model Derivation related figures [10]

Continuous review policy is the policy where inventory is monitored real time and orders are placed when inventory
level reaches the reorder point. However, for the periodic review policy, the inventory position is checked at fixed
intervals only, and orders are placed based on the current position. Fig 3 shows the order quantity and order time in
each of these two policies.

Figure 3. Continuous Review Policy and Periodic Review Policy [11]

In the above figure, the left hand side represents continuous review policy. There is a fixed reorder point for the on
hand inventory. When it reaches this fixed point, a new order should be placed regardless of the time. The right hand
side shows periodic review policy, which is different from continuous review policy. There is a fixed checking
interval, and the order should be made based on the actual inventory position at the time of checking. Table 1 shows
the differences between these two policies.
Table 1. Comparison of Continuous Review Policy vs. Periodic Review Policy
Continuous Review Policy Periodic Review Policy
Order Time Variable Order Intervals Fixed Order Intervals
Order Quantity Fixed Order Quantity Variable Order Quantity
Ease of Management Review with high frequency Review with low frequency
Safety Stock Smaller Larger
Item Classification Item A Item C
Advantages Easy to know when to reorder; Reducing the time of analyzing
Accurate inventory counting inventory count;
Lower investment for counting
Disadvantages Huge investment on counting Not accurate inventory level
inventory level counting
 Ma, Lei and Okudan
Since the blood plasma is not used for profit, blood plasma cannot be simply judged based on item classification
rules. It is reasonable to decide which policy to utilize according to the total inventory cost. Therefore, our method is
calculating the total inventory cost with respect to two different inventory policies, and inventory monitoring
investment consideration as well as taking into account the budget constraints to select the appropriate policy.

4. Case Study
We consider three specific cases to demonstrate our application: in the first case, demand is a random variable, but
lead time is constant; the second case deals with constant demand and random lead time; in the last one both demand
and lead time are random variables. We do not consider the scenario with constant demand and lead time since this
case is rare in the practice. Sensitivity analysis is conducted on these three scenarios with different service level to
assess risks within each inventory control system. By calculating the possible safety stock level and associated total
inventory costs we can capture the degree of risks for each policy. Model assumptions made in our model are
categorized in two groups: (1) structural (logic) assumptions, and (2) numerical (data) assumptions.
Table 2. Model Assumptions
Structural assumptions Numerical assumptions
Consider demand per week and lead time by week 20 minutes of thawing from frozen conditions

Sufficient blood donor supply when facing shortage 90% service level

Inventory monitor investment includes purchasing

monitoring software and hiring the required labor

Total inventory annual cost = annual setup cost + annual

holding cost + annual safety stock holding cost +annual
monitoring cost

Numerical assumptions also include data distributions of demand and lead time for the random cases.
1) Demand and lead time are presented in weeks.
2) The blood donors come to donate when they receive the blood shortage advertisement.
3) Both continuous review policy and periodic review policy are developed under service levels of 90%,
which means that in 90% cases there is no shortage based on the adopted policy.
4) Inventory monitoring investment, including purchasing software or hiring labor, does not include the
inventory setup cost or inventory holding cost, and it is an independent cost type within the total cost.
5) The total inventory cost is calculated by the modified equation:
Total annual inventory cost = annual setup cost + annual holding cost + annual safety stock holding cost
+annual monitor cost. The setup cost is used to pay the advertisement of blood shortage cost. The holding
cost is used to pay all the blood plasma holding related cost. The annual safety stock holding cost is used to
consider the safety stock. The monitoring cost, which is regarded as an independent cost, is used to pay for
the labor or purchasing monitoring software and related facilities.

4.1 Variable Demand and Constant Lead Time

The weekly demand ( ) is a random variable with the following probabilities.

Table 3. Weekly Demand and Probabilities

150 0.3
200 0.4
250 0.3

Set up cost: ,
Holding cost: ,
Lead time:
 Ma, Lei and Okudan

4.1.1 Continuous Review Policy

Mean demand is
Demand deviation is √
From EOQ model, equation (1), the order quantity per order is √ √

Table 4. Z Value and Service Level [10]

Z Service Level
1.28 90%
1.65 95%
2.33 99%
3.08 99.9%

Since the service level is 90%, the reorder point is:

Safety stock= √ √
Reorder point
Total inventory cost
where is annual monitoring cost in this policy; we assume it equals to $500. Therefore, the total cost is $5871.

4.1.2 Periodic Review Policy

From EOQ model, equation (2), the order interval is √ √

Demand standard deviation over the protection interval is √ √
Safety stock=
Total inventory cost
Where, is the annual monitoring cost in this policy; we assume it to be: $100. Therefore, the total cost in this
case is $5486.

In general, continuous review policy is better than periodic review policy. If the budget is over the total cost of the
continuous review policy, we will select it. If the budget is lower, lower than the total cost of continuous review
policy but over the periodic review policy, we will select lower cost one. Therefore, in this case:

Continuous Review Policy

Periodic Review Policy
Periodic Review Policy (Closer to budget)

4.2 Variable Lead Time and Constant Demand

The lead time is a random variable with the following probabilities. Additional cost and demand information is also
provided.
Table 5. Lead Time and Probabilities
L P(L)
1 0.4
2 0.3
3 0.2
4 0.1
Set up cost: ,
Holding cost: ,
Demand:
 Ma, Lei and Okudan
4.2.1 Continuous Review Policy

From EOQ model, equation (1), the order quantity per order is √ √
Mean lead time is
Lead time deviation is √
Safety stock=
Reorder point is
Total inventory cost
where, is the annual monitoring cost in this policy; we assume it to be: $500. Therefore, the total cost is $6056.

4.2.2 Periodic Review Policy

From EOQ model, equation (2), the order interval is √ √

Safety stock is √
Total inventory cost
Where, is annual monitor cost in this policy; we assume it to equal $100. Therefore, the total cost when
adopting periodic review policy is $5843. Therefore, in this case:

Continuous Review Policy

Periodic Review Policy
Periodic Review Policy (Closer to budget)

4.3. Variable Lead Time and Variable Demand

The demand is a random variable with probabilities shown in Table 2, and the lead time is also a random variable
with probabilities shown in Table 4.
Set up cost: ,
Holding cost: ,
4.3.1 Continuous Review Policy
Mean demand is
Demand deviation is √
Mean lead time is
Lead time deviation is √
From EOQ model, equation (1), the order quantity per order is √ √
Safety stock is √ √
Reorder point is
Total inventory cost
Where, is the annual monitor cost in this policy; we assume it to be: $500. Therefore, the total cost is $6065.

4.3.2 Periodic Review Policy

From EOQ model, equation (2), the order interval is √ √
Safety stock is √ √
Total inventory cost
Where, is the annual monitor cost in this policy; and we assume it to be: $100. Therefore, the total cost when
adopting periodic review policy is $5859. Therefore:
Continuous Review Policy
Periodic Review Policy
Periodic Review Policy (Closer to budget)
 Ma, Lei and Okudan
4.4. Risk Analysis and Discussion
The cases explained above are summarized in a table format below.
Table 6. A Summary of Cases
Budget Safety Inventory Inventory Policy
Stock
Variable Demand and $5871 71 Continuous Review Policy
Constant Lead Time $5871 86 Periodic Review Policy
Variable Lead Time $6056 256 Continuous Review Policy
and Constant Demand $6056 443 Periodic Review Policy
Variable Demand and $6065 265 Continuous Review Policy
Variable Lead Time $6065 459 Periodic Review Policy
We use system service level as input and safety stock and inventory cost as output for the risk analysis, and also
include safety stock and inventory cost as inventory threshold values. In order to capture system risks, a range of
safety inventory stock and corresponding required inventory cost are calculated, as shown in Table 7.
Table 7. Risk Analysis for Two Inventory Policies
Inventory Management Policy Continuous review policy Periodic review policy
Service level 90% 95% 99% 99.9% 90% 95% 99% 99.9%
Variable Safety stock
71 91 129 170 86 111 156 206
demand and (unit)
constant Inventory cost
5871 5891 5929 5970 5486 5511 5556 5606
lead time ($)
Constant Safety stock
256 330 466 616 443 572 807 1067
demand and (unit)
variable lead Inventory cost
6056 6130 6266 6416 5843 5972 6207 6467
time ($)
Variable Safety stock
265 342 483 640 459 592 837 1107
demand and (unit)
variable lead Inventory cost
6065 6142 6283 6439 5859 5993 6237 6507
time ($)

Table 7 shows that inventory threshold values are all positive no matter what the inventory management policy is.
The main difference is that safety stock only relies on service level, while inventory cost depends on both service
level and conditions of demand and lead time (Calculations above show that service level is the only variable in the
formula with relation to safety stock, and demand variability or lead time and service level are the variables in the
formula for the inventory cost). The selection of inventory policy is associated with inventory cost, which is also
related to both service level and conditions of demand and lead time.

5. Conclusion and Future Work

EOQ based continuous review policy and periodic review policy are broadly used in industrial inventory
management. In general, continuous review policy is more popular because it provides an on-time inventory control
method; however, the cost of this method is higher because the method requires typical facilities (technology) and/or
people to monitor the inventory level. The periodic review policy is not sensitive to the inventory level but it
requires checking the inventory level periodically. The method has no typical facility or labor requirement;
therefore, the cost is much lower than the continuous review policy. This paper compared total inventory cost of
these two policies in the application of blood plasma inventory in an effort to select the most appropriate policy
given budget constraints. We consider three cases, which cover almost all situations; results across all three cases
point to the fact that when a higher budget is provided continuous review policy is appropriate, whereas periodic
review policy seems to yield smaller costs for lower budget conditions. However, in our future work we will take a
closer look at the risk induced on the healthcare system due to potential shortages when periodic monitoring is used.
Empirical validation of the results is underway, for which we have used the attached survey (in the Appendix) for
data collection.
 Ma, Lei and Okudan

Reference
1. Rautonen, J., 2007. “Redesigning supply chain management together with the hospitals”. Transfusion. Vol. 47,
2, pp. 197S-200S.
2. Hess, J.R., 2004. “Red cell freezing and its impact on the supply chain”. Transfusion Medicine. Vol. 14, 1, pp.
1-8.
3. Jeroen, B. and Hein, F., 2011. “Supply chain management of blood products: a literature review”. European
Journal of Operational Research. Vol.217, issue 1, pp1-16.
4. Jagannathan, R. and Sen, T., 1991. “Storing cross matched blood: a perishable inventory model with prior
Allocation”. Management Science. Vol. 37, 3, pp. 251-266.
5. Kopach, R., Balcioglu, B. and Carter, M., 2008, “Tutorial on constructing a red blood cell inventory
management system with two demand rates”. European Journal of Operational Research. Vol. 185, 3, pp.
1051-1059.
6. Rytila, J. S. and Spens, K. M., 2006. “Using simulation to increase efficiency in blood supply chains”.
Management Research News. Vol. 29, 12, pp. 801-819.
7. Brodheim, E. and Prastacos, G. P., 1979. “The Long Island blood distribution system as a prototype for
regional blood management”. Interfaces.Vol. 9, 5, pp. 3-20.
8. Hemmelmayr, V., Doerner, K. F., Hartl, R. F. and Savelsbergh, M. W.P., 2009. “Delivery strategies for blood
products supplies”. OR Spectrum. Vol. 31, 4, pp. 707-725.
9. Custer, B., Johnson, E.S., Sullivan, S.D., Hazlet, T.K., Ramsey, S.D., Murphy, E.L and Busch, M.R, 2005.
“Community blood supply model: development of a new model to assess the safety, sufficiency, and cost of the
blood supply”. Medical decision making. Vol. 25, 5, pp. 571-582.
10. Phillips, D.T., Ravindran, A. and Solberg, J.J., 1987. Operations Research: Principles and Practice. Second
Edition, Wiley, pp.343-347.
11. Google, 2012.
http://www.google.com/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=2&ved=0CDgQFjAB&url=http
%3A%2F%2Fwww.nd.edu%2F~kmatta%2FBAMG30700%2FLectures%2FLect%252012%2520-
%2520Continuous%2520%26%2520Periodic%2520Review%2520Systems.ppt&ei=1h40UbOcIYSu8QTevoH
YAw&usg=AFQjCNHR4ITpkea5ooxBAoH3ilSba6X10A&sig2=2m_bovsw1cnF05NYbh_TRQ
 Ma, Lei and Okudan

Appendix

Research Target: Hospital/Blood Bank

Required Data:
1. Historical (one-year) weekly demand data for blood plasma (stochastic or constant)
2. Holding cost per unit per week (assumed constant)
3. Order cost per order (assumed constant)
4. Lead time (stochastic or constant)
5. Inventory monitoring cost in PA vs. elsewhere.

Related Questions:
1. A) Is the demand seasonal?

B) How is the recording like? (daily /weekly /bi-weekly/ monthly/ seasonally)

C) Is there any shortage? What is the common shortage level? What is the frequency of shortage?

2. A) What is storage capacity?

B) How much is the storage cost per unit capacity (ml/l) per unit time (daily/ weekly/ bi-weekly/ monthly
/seasonally)?

C) How long can the blood plasma be stored until it no longer can be used? In general, for how long it will be
stored in the blood bank/hospital?

D) How is the storage environment like? Is there any extra cost for this environment?

3. A) Is the supply seasonal?

B) Is the donor paid? How much per time/ per donation?

4. A) If there will be shortages of blood plasma, what are the contingency scenarios?

B) How are donors encouraged to donate?

C) If encouragement is useful, in general, starting from shortage time, when will the quantity of donors be
increased due to encouragement (lag time)?

5. A) How is the inventory level monitored? By people recording, or by automated technology-based recording?

B) What are the costs of both systems?

By People By Machine
Salary per employee $ Building Cost $
# of employee Maintenance Cost $