IU ISE506IU: INVENTORY CONTROL & MANAGEMENT I S E

Lot Sizing with

Time–varying Demand
Dao Vu Truong Son
Email: dvtson@hcmiu.edu.vn

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Contents

• Characteristics

• Wagner – Whitin algorithm.

• Heuristic method:

• Silver – Meal algorithm

• Other heuristics

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D
Q

T
• Infinite planning horizon

• Demand D is constant

Highly impractical, D usually changes with time

Production quantity changes with time

inventory problems change with time

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Characteristics
 Demand varies from period to period

 The demand for each period is exactly known

 Costs may vary from period to period

 Capacity may vary from period to period

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Big versus Small Buckets

 Big time-bucket models
 Items produced/ordered in a period can be used to satisfy
the demand for that period

 Small time-bucket models

 Production/supply leadtimes can take multiple periods

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Some Approaches
 Basic economic quantity (EOQ):
• Useful when the variation of demand is low.
 Optimal solution given by mathematical models:
• Wagner – Whitin algorithm.
 Heuristic (rule-based) method:
• Silver – Meal algorithm
• EOQ expressed as a time supply (POQ)
• Least unit cost (LUC)
• Part-Period Balancing (PPB)
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Assumptions for the Basic Model

Demand varies from period to period but is exactly known for

each period.
Demand in each period must be satisfied during the same
period (backordering is not allowed).
There are no limits on how much can be produced or ordered.
Itemsproduced/ordered in a period are available to satisfy
demand during the same period (big bucket model).
Setup/ordering, production/purchasing, and inventory holding
costs can vary period to period.

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Objective

Determine the optimal order quantity (lot size) in each

period so that the demand in each period is met while
the sum of ordering, purchasing, and inventory
holding costs are minimized.

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Notation
• t: a period (e.g., day, week, month); t = 1, … ,T, where T represents the
planning horizon
• Dt: demand in period t (number of units)
• ct: unit purchasing/production cost
• At (or Co,t): ordering/setup cost associated with placing an order (or initiating
production) in period t
• ht (or Ch,t): cost of holding one unit of inventory from period t to period t +1
• Qt: the size of the order (or lot size) in period t; a decision variable

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Example

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The Lot for Lot Solution

Order to satisfy exactly as demand in 1 period??

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The Fixed Order Quantity Solution

Combine order to satisfy demand in a few periods

In this example,
a. use Q1 = Q4 = Q7 = 100
b. Q1 = D1 + D2; Q3 = D3+D4; …Q9 = D9+D10

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A Mixed Integer Linear

Program (MILP) Formulation

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Solution Approach
Solve as a standard MILP (using for example a branch and
bound algorithm); several commercial MILP solver software tools
are available

Develop a customized solution that takes advantage of structural

properties specific to the problem (e.g., the Wagner-Whitin
algorithm)

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Property 1
A replenishment takes place when the inventory level is zero

Property II
There is an upper limit to how far a period j we would
include its requirements D(j) in a replenishment quantity.
Eventually, the carrying costs become so high that it is less
expensive to have a replenishment arrive at the start of period
j than to include its requirements in a replenishment from
many periods earlier

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The Basic Idea of the

Wagner-Whitin Algorithm
zk* : the total costs of the best replenishment strategy that
satisfies the demand requirements in periods 1,2,…k.

Using property 1, either Qt=0 or Qt=Dt+…+Dk for some k.

If jk*
= t = last period when we have place order exactly Dt+
Dt+1 …Dk in period jk*.

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The Basic Idea of the

Wagner-Whitin Algorithm
Construct an algorithm where the decision is whether or not
to order in a given period. If we order, then the order quantity
should be just enough to cover demand until the next period
in which we order.

Solve a series of smaller sub-problems (a one period problem,

a two period, …., N period problem), where the solution to
each sub-problem is used in solving the next subproblem.

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Example

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Example
 Step 1: Obviously, just satisfy D1 (note we are neglecting
production cost, since it is fixed).

 Step 2: Two choices, either j2* = 1 or j2* = 2.

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Example (Continued…)
 Step3: Three choices, j3* = 1, 2, 3.

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Example (Continued…)
 Step 4: Four choices, j4* = 1, 2, 3, 4.

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Example (Continued…)
 Step 5: Only two choices, j5* = 4, 5.

 Step 6: Three choices, j6* = 4, 5, 6.

And so on.

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Example Solution

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Example Solution
 Optimal Policy:
• Order in period 8 for 8, 9, 10 (40 + 20 + 30 = 90 units)
• Order in period 4 for 4, 5, 6, 7 (50 + 50 + 10 + 20 = 130
units)
• Order in period 1 for 1, 2, 3 (20 + 50 + 10 = 80 units)

 Note: we order in 7 for an 8 period problem, but this never

comes into play in optimal solution.

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Disadvantages
 The algorithm is too complicated.
 Need a well – defined ending point.
 The replenishment quantities should not change.
 Replenishments can be made only in discrete interval

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Assignment
 Find the optimum ordering policy using the following
data using Wagner-Whitin algorithm

Month Demand Setup cost Inv. Cost

1 80 60 2
2 60 40 2
3 40 60 1
4 70 45 2
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Assignment
 Demand for a 12-month horizon is as follows: 400; 600;
1000; 800; 1200; 900; 800; 1000; 1200; 700; 600; 800.
 Inventory holding is 20% of unit prize C = $20.
 Ordering cost is $300 per time. Calculate total cost
 a. using lot-for-lot approach.
 b. Using fixed order quantity, 4 times a year.
 c. Using fixed order quantity, 2 times a year.
 d. Usin Wagner-Whitin approach.