7th IFAC Conference on Manufacturing Modelling, Management,

and Control
International Federation of Automatic Control
June 19-21, 2013. Saint Petersburg, Russia

Inventory placement optimisation in complex supply chains

R. Hammami*. Y. Frein**

* ESC Rennes School of Business, Rennes, France (e-mail: hammami.ramzi@gmail.com)

**Laboratoire G-SCOP, Grenoble INP, UJF, CNRS, France (e-mail: yannick.frein@g-scop.inpg.fr)

Abstract: We propose an inventory placement model for general multi-echelon supply chains

where manufacturing facilities have finite capacities and both input and output items are considered

in every facility. Holding inventories is motivated by the satisfaction of customer lead time constraints.

Keywords: Inventory placement, Supply chain management, Delivery lead time, Finite capacity.

1 INTRODUCTION beginning of the planning horizon). Hence, positioning

inventories is motivated by the necessity of satisfying the
Global muli-echelon supply chains are usually character- customer lead time constraint.
ized by large lead times of purchasing, manufacturing and We consider the inventory placement problem in the
transportation. This leads to increasing the total produc- context of general multi-echelon supply chains. This is
tion cycle time. However, the market is being very com- the first contribution of our paper. Indeed, as under-
petitive and companies are increasingly constrainted (by lined by Graves and Willems (2003), much of inventory
their customers) to meet short customer lead times. The placement models deal with specific supply chain struc-
customer lead time is defined as the time interval between tures such as serial systems (Arslan et al., 2007), assem-
the release of an order and the due date of that order (as bly systems (Benjaafar and ElHafsi, 2006) or distribution
required by the customer). When the total production systems (Gurbuz et al., 2007). In addition, we manage
cycle time is larger than the customer lead time, the sup- the stocks of both input and output products in each fa-
ply chain needs to hold inventories in order to shorten the cility of the supply chain which is another novelty com-
delivery lead time and, consequently, satisfy the customer pared to many published papers where a single product
lead time constraints. The delivery lead time is defined is considered (e.g., Gurbuz et al. (2007) and Moinzadeh
as the real elapsed time between releasing an order and (2002)). Our model also makes contribution by consid-
receiving it by the customer ering finite capacities in the manufacturing facilities as
Thus, one key and challenging question that arises is against to most existing works (e.g., Ould Louly and Dol-
how to best manage and coordinate inventories in the sup- gui, 2009, Graves and Willems, 2008; Arslan et al., 2007;
ply chain so as to meet customer lead time with minimum Benjaafar and ElHafsi, 2006; Simchi-Levi and Zhao, 2005;
systemwide inventory holding cost. The central issue in Ettl et al., 2000; Moinzadeh, 2002).
this problem is to determine the location and size of in- The model determines the stock level to be kept for each
ventories. In the literature, the inventory placement prob- product in each facility in each period. This stock level
lem usually consists in positioning stocks throughout the may vary from one period to another. For each customer
supply chain to cope with demand and/or lead times un- order, we impose that the delivery lead time must not ex-
certainties and meet the service requirements while mini- ceed the customer lead time. To calculate the delivery lead
mizing the total incurred inventory cost. In this work, the time, we consider the lead times of purchasing, process-
demand is deterministic (the arrival dates, the due dates, ing in manufacturing and distribution facilities, and trans-
and the sizes of orders are assumed to be known at the portation throughout the supply chain. The different lead

978-3-902823-35-9/2013 © IFAC 412 10.3182/20130619-3-RU-3018.00332

2013 IFAC MIM
June 19-21, 2013. Saint Petersburg, Russia
times are deterministic. The objective is to minimize the
total inventory cost. We formulate the problem as a non-
linear mixed integer programming model.
The paper is organized as follows. In section 2, we detail
the different features of the proposed model. The mathe-
matical formulation of the problem is addressed in section
3. We dedicate section 4 to computational experiments
and insights. Finally, we give concluding remarks and new
research perspectives.
2 MODEL SETTINGS
We consider a supply chain with a set of manufacturing
facilities M, a set of distribution facilities D, and a set of
suppliers S (nodes without upstream stages). We denote
by U p(j) the set of upstream facilities that supply facility
j and Down(j) the set of downstream facilities that are
supplied by j.
For simplification reasons, we consider only one cus-
tomer and only one final product. We consider the differ-
ent purchased and intermediate products that are required
to obtain this final product. We denote by P the set of all
products. As in Simchi-Levi and Zhao (2005), we assume
that each facility j manages a unique output item (which
may be an intermediate or a final product), one unit of
which is possibly obtained from multiple units of multiple
input items (which may be purchased or/and intermediate
products). Thus, to each facility j correspond a set of in-
put products and a unique output product. We denote by
In(j) the set of input products of facility j while Out(j)
represents the output product of j. Clearly, for j ∈ D,
In(j) = Out(j). The scalar Φqp indicates how many units
of input item q are required per output product unit p. We
assume that each facility j has only one upstream node for
each of its input items. This upstream node may be an
external supplier in S or another facility in M .
The planning horizon is divided into a set of periods
denoted by T . We let length(t) denote the length of pe-
riod t. Orders are placed by customer at the beginning of
every period. We assume that the amount and the due
date of each order are known at the beginning of the plan-
ning horizon. We let clt(t) denote the customer lead time
regarding the order of period t. Such a demand process
corresponds to a usual realistic situation in the B to B
context, basically in the automotive industry. We denote
by Dpj t
the demand of final product p triggered by the
customer order of period t in distribution facility j.
We consider four types of lead times in the computation
of delivery lead time: (1) the procurement lead times as-
sociated with suppliers, (2) the transportation lead times
between the different facilities and towards the customer,
(3) the manufacturing lead times, and (4) the processing
lead times in distribution facilities. The manufacturing
lead time is the time from when all of the inputs are avail-
able until production is completed and available to serve
413
demand. Since we consider a finite manufacturing capac-
ity, the manufacturing lead time depends on the manufac-
tured quantity. We denote by δ(xpj ) the manufacturing
lead time of x units of product p in facility j (δ(xpj ) =
xpj −1
time required to obtain the first unit + flow rate of p in j ).
Depending on the role of node i (supplier or facility), we
let λp,i→j denote the procurement or transportation lead
time of product p from node i to node j. In each distri-
bution facility j, we consider a fixed processing lead time
denoted by θ j . It represents the elapsed time between re-
ceiving products from upstream facilities and making them
available for delivery.
In every period, we assume that each facility can place
at most one procurement order to each of its upstream
facilities. We assume that the downstream facility has to
wait until all required input items become available be-
fore starting processing. In the case of a facility supplying
multiple downstream facilities, we assume that the facil-
ity releases the requirements of all adjacent downstream
facilities at the same time. Then, products are received in
each downstream facility depending on the transportation
lead time.
• Outputs/Inputs of distributions facilities. In
every period t, each facility j in D must be able to:
t
— fill its demand Dpj within the customer lead
time. If there is not enough stock of p at the
beginning of t, the required quantity must be
obtained from the upstream facility.
— replenish its stock level for the next period.
• Outputs of manufacturing facilities. In every
period t, each facility j (j ∈ M ) must be able to:
— fill the requirements of its downstream facilities
regarding its output product p. If there is no
enough stock of p at the beginning of t, the net
required quantity must be manufactured in j.
— manufacture what is required to replenish the
stock level of its output product p for the next
period. This can start only after filling the re-
quirements of the downstream facilities.
• Inputs of manufacturing facilities. In every pe-
riod t, each facility j (j ∈ M) must be able to obtain
the required quantity of each input item q in order to
use it in one of the following cases:
— Case 1: only to replenish the stock level of input
item q for the next period,
— Case 2: in addition to the needs of the first case
(if any), to use it to manufacture what is re-
quired to replenish the stock of the output prod-
uct in facility j,
2013 IFAC MIM
June 19-21, 2013. Saint Petersburg, Russia

t
— Case 3: in addition to the needs of the first and by expression (1) where ICpj represents the unit inventory
second cases (if any), to use it to manufacture holding cost of product p in facility j over period t.
the net required quantity of the output product
t t
in facility j. Min t∈T j∈J p∈P ICpj hpj (1)

Each (manufacturing or distribution) facility is a poten- In case of j ∈ D, the inbound quantity of product p
tial location for holding stocks not only for output prod- in period t is the sum of the quantity received from the
ucts but also for input items. The model determines the t
upstream facility i (wp,i→j ) and the available stock at the
stock level that must be kept for each product in each fa- t
beginning of t (hpj ). This quantity must be equal to the
cility at the beginning of each period in order to meet the outbound quantity which is obtained by the sum of de-
customer lead time constraints with the lowest total cost. t
mand in j (Dpj ) and the stock level that must be kept for
the next period (ht+1
pj ). This is expressed by constraints
(2).
3 MODEL FORMULATION
The main decision variables are: t
+ htpj = ht+1 t
wp,i→j pj + Dpj (2)
j ∈ D, i ∈ Up(j), p ∈ In(j), t ∈ T
• htpj : stock level of product p that must be kept in
facility j (j ∈ M ∪ D) at the beginning of period t. According to constraints (3), for an output product p
in manufacturing facility j in period t, the sum of the to-
• xtpj : quantity of output product p manufactured in
tal manufactured quantity (xtpj + stpj ) and the available
facility j (j ∈ M ) in period t in order to fill the down-
stock at the beginning of period t (htpj ) must be equal
stream demand of period t. It does not include the
to the sum of the quantity delivered to downstream fa-
quantity required to replenish the stock of p in j (for t
cilities ( i∈Down(j) wp,j→i ) and the stock to be kept for
the next period). t+1
the next period (hpj ). Constraints (4) are relative to the
• stpj : quantity of output product p manufactured in flows conservation conditions for an input product q in a
facility j (j ∈ M ) in period t in order to replenish the manufacturing facility j in period t. Indeed, the inbound
stock of p in j for the next period. It does not include quantity (obtained as in the case of distribution facilities)
the quantity required to fill the downstream demand must be equal to the outbound quantity which is given by
of period t. the sum of the total quantity of q required by the manu-
facturing activities in j (Φqp (xtpj + stpj )) and the stock to
t
• wq,i→j : total quantity of input product q ordered be kept for the next period (ht+1qj ).
(and received) by facility j (j ∈ M ∪ D) from node i
(i ∈ S ∪ M) in period t.
t
xtpj + stpj + htpj = t
i∈Down(j) wp,j→i + ht+1
pj (3)
• zq,i→j: net requirement of input product q in facility
j (j ∈ M ∪D) that is triggered by the downstream de- j ∈ M, p ∈ Out(j), t ∈ T
mand in period t and that must be obtained from the
t
upstream node i (i ∈ S ∪ M). If j ∈ M , then zq,i→j
represents the quantity of q that is still required (after t
wq,i→j + htqj = Φqp (xtpj + stpj ) + ht+1 (4)
qj
considering the available stock of q at the beginning
of t) to manufacture the quantity xtpj of output prod- j ∈ M, i ∈ U p(j), q ∈ In(j), p ∈ Out(j),
t
uct p. If j ∈ D, then zq,i→j represents the quantity of t ∈ T
q that is still required (after considering the available
stock of q at the beginning of t) to fill the external In every period t, each manufacturing facility i must
t t
demand Dqj . Note that zq,i→j does not include the be able to fill the requirements of its downstream fa-
t
quantity required to replenish the stock levels in j cilities (given by j∈Down(i) wp,i→j ) from its available
neither for input product q nor for output product. stock hpi and the manufactured quantity xtpi . If htpi ≥
t
t
j∈Down(i) wp,i→j , then we do not need manufacturing
t t
• z q,i→j : equals 1 if zq,i→j > 0, 0 otherwise. t
(i.e., xpi = 0). Hence, we add the following constraints.

xtpi = max( t
j∈Down(i) wp,i→j − htpi , 0) (5)
3.1 Objective function and flows con-
straints i ∈ M, p ∈ Out(i), t ∈ T
t
The objective function of the model consists in minimizing The variables zq,i→j are determined by constraints (6)
the total inventory cost over the planning horizon as given and (7) for j ∈ D and j ∈ M , respectively. Indeed, if

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June 19-21, 2013. Saint Petersburg, Russia

there is enough stock of input product q in facility j at process, all input products must be available which re-
t
the beginning of period t, then zq,i→j takes the null value. quires the lead time max ∆intqj , q ∈ In(j) . Thus,
t
Otherwise, zq,i→j is given by the difference between the the values of ∆outtpj are determined according to con-
requirement of q triggered in j by the downstream demand straints (10).
t
(Dqj for j ∈ D and Φqp xtpj for j ∈ M) and the available
stock of q at the beginning of t (htqj ). ∆outtpj = δ(xtpj ) + max ∆intqj , q ∈ In(j) (10)
j ∈ M, p ∈ Out(j), t ∈ T
t t
zq,i→j = max(Dqj − htqj , 0) (6)
j ∈ D, i ∈ Up(j), q ∈ In(j), t ∈ T Note that, according to constraints (9) and (10),
∆outtpj = 0 if there is enough stock of p in j at the begin-
t ning of t. Now, we turn to the lead time ∆intqj . If the net
zq,i→j = max(Φqp xtpj − htqj , 0) (7) requirement z t t
q,i→j is null, then ∆inqj must be null. Oth-
j ∈ M, i ∈ U p(j), q ∈ In(j), p ∈ Out(j), t ∈ T erwise, we first need to make product q available in facility
i, which requires the lead time ∆outtqi , and then transport
t
Finally, the variables zq,i→j and z tq,i→j are related by products from i to j which requires the lead time λ
q,i→j .
the following constraints where Ψ is a sufficiently big num- Thus, the values of ∆int are determined according to
qj
ber. constraints (11).
1 t
z ≤ z tq,i→j ≤ Ψzq,i→j
t
(8) ∆intqj = min ∆outtqi + λq,i→j , Ψzq,i→j t
(11)
Ψ q,i→j
j ∈ M ∪ D, i ∈ Up(j), q ∈ In(j), t ∈ T j ∈ M ∪ D, i ∈ U p(j), q ∈ In(j), t ∈ T

Similarly, we formulate the constraints (12) relative to

3.2 Calculation of lead times Ωintqj and where we replace zq,i→j
t t
by wq,i→j .
We consider the following new variables that will serve to
model the lead time constraints: Ωintqj = min ∆outtqi + λq,i→j , Ψwq,i→j
t
(12)
j ∈ M ∪ D, i ∈ U p(j), q ∈ In(j), t ∈ T
• ∆outtpj : lead time required to obtain in facility j the
quantity of output product p that corresponds to the
downstream demand in j in period t. This quantity 3.3 Lead times constraints
t t
is given by Dpj for j ∈ D and i∈Down(j) wp,j→i for Finally, we formulate the different lead times constraints.
j ∈ M. Constraints (13) impose that the delivery lead time of
• ∆inqj : lead time required to obtain in facility j the every order must not exceed the customer lead time. The
t
t
quantity zq,i→j of input product q. delivery lead time of product p from distribution facility
j regarding the order of period t is given by ∆outtpj +λp,j
t where λp,j is the transportation lead time from j to cus-
• Ωinqj : lead time required to obtain in facility j the
t tomer.
total ordered quantity wq,i→j of input product q.

Now, we formulate the constraints that define the above ∆outtpj + λp,j ≤ clt(t) (13)
variables. Regarding ∆outtpj , there are two cases: t ∈ T, j ∈ D, p ∈ Out(j)
• Case of j ∈ D. If there is not enough stock in j The manufacturing capacity and stock replenishment
at the beginning of t, then we need to receive the constraints in manufacturing facilities are guaranteed by
t
net required quantity of p (given by zp,i→j ) from the constraints (14).
upstream node which requires the lead time ∆intpj .
t
The quantity zp,i→j will be available for delivery after Ωintqj ≤ length(t) − δ(xtpj + stpj ) (14)
a processing lead time θ j . Thus, the values of ∆outtpj j ∈ M, q ∈ In(j), p ∈ Out(j), t ∈ T
for distribution facilities are determined according to
constraints (9). Indeed, if xtpj + stpj = 0, then constraints (14) only en-
sure that the input products (if ordered) must be received
∆outtpj = ∆intpj + θj z tp,i→j (9) before the end of period t which allows for replenishing
j ∈ D, i ∈ U p(j), p ∈ Out(j), t ∈ T the stock of input products. If xtpj + stpj > 0, then con-
straints (14) impose that all required input items must be
• Case of j ∈ M . If there is not enough stock in available before length(t) − δ pj (xtpj + stpj ) in order to have
j at the beginning of t, then we must manufacture enough time to manufacture the quantity (xtpj + stpj ) be-
the net required quantity xtpj which requires the lead fore the end of t. This allows for replenishing the stock of
time δ(xtpj ). But, before starting the manufacturing the output product. In distribution facilities, we only need

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to guarantee the replenishment of input products. This is Table 2. Model Solutions 2

expressed by constraints (15). Demand 100 ∀t (25,75,125,175) (175,125,75,25)
Cost 2561 3033 2918
Ωintqj ≤ length(t) j ∈ D, q ∈ In(j), t ∈ T (15) htp1,m1 149 ∀t 0 ∀t 146 ∀t
htp2,m1 51 ∀t 243,202,203,200 54,54,74,60
htp2,m2 0 ∀t 0 ∀t 23 ∀t
4 EXPERIMENTS htp3,m2 100 ∀t 76,91,78,75 81,75,90,108
htp2,m3 0 ∀t 0 ∀t 27 ∀t
We linearize the model by adding adequate intermediate htp4,m3 100 ∀t 81,95,83,75 77,75,90,106
variables and linear constraints and solve it with Cplex. htp5,m4 25 ∀t 0,81,118,100 121,50,0,15
We consider an example with one supplier s that provides htp3,m4 = htp4,m4 = htp5,d = 0 ∀t
manufacturing facility m1 with product p1. This product Observing Tables 1 and 2, we deduce the following:
is transformed into output product p2 in m1. Product p2 is
delivered to manufacturing facilities m2 and m3 where it • Unlike some inventory management policies that
is used to obtain output products p3 and p4, respectively. choose to focus only on the stocks of final products to
These products are delivered to manufacturing facility m4 cope with customer lead time constraints, the model
where there are used to generate output product p5 which shows that the best system performance is generally
is shipped to customer k through distribution centre d. obtained when the stocks of purchased and interme-
The unit inventory costs are as follows: 1 for p1 in m1, 1.2 diate products in the different facilities of the supply
for p2 in m1,1.3 for p2 in m2 and m3, 1.7 for p3 in m2, chain are also considered.
1.9 for p4 in m3, 1.8 for p3 in m4, 2 for p4 in m4, 2.8 for
• For scenarios with clt(t) and length(t) = 7∀t, the
p5 in m4, and finally 3 for p5 in d.
total demand over the planning horizon is constant for
The time required to obtain the first unit and the flow all instances (total demand =400). We note that the
rate in manufacturing facilities m1, m2, m3, and m4 are smallest optimal cost is obtained when the demand is
(0.01, 50), (0.02, 40), (0.02, 33) and (0.04, 25), respec- stationary (100 per period). For instance, the optimal
tively. The fixed processing lead time in distribution facil- cost increases by about 18% if we consider the demand
ity d is 0.5. The transportation lead times from supplier scenario (25,75,125,175) instead of 100 ∀t.
s to m1, m1 to m2, m1 to m3, m2 to m4, m3 to m4, m4
to d , and d to customer k are 3, 1, 1, 1, 1, 2, and 0.5, • When demand is increasing over time, one may expect
respectively. Finally, Φqp = 1 ∀p, q. that the inventory levels of the different products will
increase from one period to another. However, the
optimal solution given by the model does not ver-
4.1 Illustration of model output ify this expectation. A similar observation is made
for scenarios with decreasing demand for which the
In order to illustrate the solvability and feasibility of the inventory levels at the optimal solutions are not nec-
proposed model, we generate different instances based essarily time-decreasing.
on the above example while varying the values of de-
mand, clt(t), and length(t). We consider 4 time peri- 4.2 Impacts of the frequency of orders
ods. We present in Tables 1 and 2 the optimal solutions
and their corresponding costs for instances with (clt(t) = For a given total demand over a given time horizon, many
(7, 5, 10, 8), length(t) = (4, 10, 6, 8)) and (clt(t) = 7 ∀t, companies are required by their customers to increase the
length(t) = 7 ∀t), respectively. number of deliveries. However, what is the impact of this
decision on the performance of the supplier in terms of
inventory cost? We consider the case where we vary the
length of periods while keeping constant the length of the
Table 1. Model solutions 1
planning horizon and the total demand which means that
Demand 80 ∀t (90,60,120,50) (160,80,20,60)
we vary the number of orders. For instance, for a total
Cost 2104 2013 2300 demand of 60 units over a planning horizon of 30 days,
htp1,m1 0 ∀t 0 ∀t 0 ∀t length(t) may be fixed to 15 days (2 orders of 30 units),
htp2,m1 90,80,280,63 191,47,99,139 90,50,336,63 10 days (3 orders of 20 units), etc. We show in Fig. 1
htp2,m2 0 ∀t 0 ∀t 0 ∀t the variation of the inventory cost as a function of the
htp3,m2 75,30,75,140 11,70,104,49 75,45,29,139 number of orders for different demand scenarios where the
htp2,m3 0 ∀t 0 ∀t 0 ∀t planning horizon is 30 days and clt(t) = 7∀t.
htp4,m3 75,30,75,140 15,77,104,60 75,45,35,139 Observing Fig. 1, we conclude that increasing the num-
htp5,m4 60,55,5,0 90,35,45,29 110,55,20,31 ber of deliveries may also give benefit to the supplier. In-
htp3,m4 = htp4,m4 = htp5,d = 0 ∀t deed, in some cases, the inventory cost decreases if we

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Figure 1: Cost as a function of number of orders
increase the number of orders. For instance the inventory
cost decreases by about 18% if we consider 4 orders instead
of 3 orders when the total demand is 180 units. However,
there are also situations where the inventory cost goes up
with the increasing number of orders. In this case, it is
interesting to use the proposed model to calculate the in-
curred additional cost in order to better negotiate with
the customer the increase of the delivery frequency.
4.3 Impacts of the customer lead time
One can expect that the inventory cost decreases with the
increasing values of the customer lead time. Nevertheless,
what is the magnitude of the impact of the customer lead
time on the inventory cost? We represent in Fig. 2 the
variation of the inventory cost as a function of clt(t) for
different demand scenarios. In all these experiments, there
are 4 time periods and length(t) = 7 ∀t.
As shown in Fig. 2, there are some value ranges of clt(t)
for which the inventory cost is not sensitive to the vari-
ation of clt(t). In this case, the proposed model can be
used to determine the shortest delivery lead time that can
be promised to the customer without any additional in-
ventory cost. As expected, there are also situations where
the inventory cost decreases with the increasing values of
clt(t). For instance, when the total demand is 400, the in-
ventory cost decreases by about 11 % if we increase clt(t)
from 6 to 7 days. In this case, the proposed model can be
used as a decision aid tool to determine the best delivery
lead time that should be promised to the customer.
5 CONCLUSION
We developed an inventory placement model where the
objective is to minimize the total inventory cost while sat-
isfying, for every order, the delivery lead time imposed by
the customer. The model deals with a complex context
where we consider general multi-echelon supply chains,
finite manufacturing capacities, and inventories of both
417
Figure 2: Cost as a function of customer lead time
output and input products in each facility. The demand is
known. This is to the best of our knowledge the first study
that explores the inventory positioning from this perspec-
tive. We performed experiments to prove the solvability of
the model and its relevance to the inventory management
science. In the future, it might be interesting to consider
the case of stochastic demand. However, in this case, we
should simplify some aspects of the current model to make
the stochastic version easy to solve and to interpret.
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