A more realistic version of this problem is when a joint set-up cost K0 is present.

This cost is incurred whenever

any product is ordered. The problem then becomes

Problem P′ : Min K0δ( t􏰄1

yit) + Kiδ(yit) + hiIit i􏰄1

Tnm

i􏰄1
s.t. (10.6), (10.7) and (10.8).

Unfortunately, this problem is considerably more difficult to solve than the simple Wagner-Whitin model. In
fact, Arkin et al. (1989) prove that it is NP- Complete. Several researchers have proposed heuristics for this
problem, including Silver (1976), Atkins and Iyogun (1988) and Joneja (1990). We present here the approach of
Joneja.

The cost covering heuristic of Joneja proceeds period by period in a forward direction. Specifically, at period t ,
the ordering policy of periods 1, 2, . . . , t − 1 has been determined and the decision is which items to order, if
any, in period t. Let ti be the last period in which item i was ordered. Let Hit denote the total inventory holding
cost incurred by item i since period ti assuming no order for item i is placed in period t. That is,

t
Hit 􏰄hi (j−ti)dij.

j􏰄ti+1

Intuitively, if we forget for the moment, the joint order cost and Hit > Ki, then it is worth ordering item i in
period t , since it costs more to keep an item in inventory from period ti (the last time item i was ordered) to t
than to order it in period t . The quantity max{Hit − Ki , 0} can be seen as the savings that are accrued by
ordering item i in period t. This approach is basically the Silver-Meal heuristic adapted to the multiple item case.
With the joint order cost present, an order should only be placed if the total savings accrued by ordering a set of
items in period t exceeds the joint order cost. Therefore, Joneja proposes the following ordering rule.

n
Rule 1. In period t, order those items i such that Hit ≥ Ki, if i􏰄1 max{Hit −

Ki,0} ≥ K0.

Joneja shows that this single rule is not quite strong enough to ensure that the schedule of orders is cost
efficient. For instance, consider the following example with two products. The holding costs are equal (h1 􏰄 h2
􏰄 1). Pick an integer m and set the demands to

d1t 􏰄0, fort 􏰄1,2,...,m−1 K0 + K1

d1m 􏰄

m−1
d2t 􏰄 0, for t 􏰄 1,2,...,m

K0 + K2 d2,m+1 􏰄 .
m
Using Rule 1, item 1 will be ordered at time m, but not item 2. Item 2 will be ordered
attimem+1.Ifbothitemswereorderedattimem,thenwepayh2d2,m+1 􏰄 K0+K2

t
it i0 i ij

S 􏰄h(t −t)

d.

demand in the next T periods. Then C(1) 􏰄 K, C(2) 􏰄 1(K + hd ), etc. In the

2
Silver-Meal Heuristic we calculate these until C(i) > C(i − 1). In this case, we stop and produce in period 1 to
meet the demand of the first i − 1 periods. We then

10.4 Exercises 177

m
in extra holding cost but save K0 in ordering costs. Therefore, for large m, we see

that we can be far from optimal.

To counteract this behavior, Joneja proposed the following additional feature.

Let t0 be the time at which the last joint order was placed, and assume item i was not included in this order
(since Hi t0 < Ki ). It may, in some cases, be advantageous to order item i at time t0 even though Rule 1 would
specify the opposite. Define

j 􏰄t0

Then Sit is the savings in inventory holding cost accrued by ordering item i at time t0. Since a joint order is
already placed in period t0, the following rule was proposed.

Rule 2. In period t, if the last joint order was in period t0, item i was not ordered in period t0 and Sit ≥ Ki, then
order item i in period t0.

Computational experiments with this heuristic, whose complexity is O(nT), show that it produces solutions
fairly close to optimal.

10.4 Exercises
Exercise 10.1. Assume order costs are general concave and time-dependent func- tions of the number of items
produced. Also, assume holding costs are general concave and time-dependent functions of the number of items
held in inventory. Prove that the Zero-Inventory Ordering Property holds in this general setting as well.

Exercise 10.2. The Silver-Meal Heuristic works as follows. Let d1, d2, . . . , dn be

the demands in the n period planning horizon. Define C(T ) to be the per period

average holding and set-up cost under the condition that the current order covers

start over with the ith period.

Construct an example where the Silver-Meal Heuristic provides a nonoptimal

solution.
Exercise 10.3. Determine the complexity of Baker et al.’s algorithm.