A Profit Maximization Lot-sizing and Supplier
Selection Problem Under Price Discount
Sakada Srun
Department of Industrial Engineering,
Faculty of Engineering, Mahidol University
Nakhon Pathom, Thailand
sakada.sru@student.mahidol.edu
Abstract—This research addresses the development of
integrated inventory lot-sizing and supplier selection
problem in supply chain management, in which a buyer
firm that has limited budget and warehouse space wants
to procure multiple products from a group of potential
suppliers and sell to their customer. In particular, the
suppliers may provide different quantity discount
scheme, ordering cost, and transportation cost. The
problem is modelled as mixed integer linear
programming (MILP) by incorporating quantity
discount. To overcome the large scale problem, Genetic
Algorithm (GA) is developed in next phase. The
comparison was conducted on both MILP and GA. The
results showed that GA has better performance in term
of solution feasibility and computational time.
Keywords-optimization; inventory lot-sizing; supplier
selection; genetic algorithm; net revenue
I. INTRODUCTION
Inventory represents a major financial investment
for any company. It represent 25 to 50 percent of total
assets in manufacturing firms and 75 to 80 percent in
wholesalers and retailers Shubham (2017). As a result,
whether a company can effectively control its cost
greatly depends on the successfulness of its
procurement policy.
In the world competitive market, multi-sourcing
has become a trend, and the alternative suppliers have
provided different selling strategy to engage the buyers.
In this circumstance, it make the buyer forms to select
the right set of supplier in order to take advantage of
differentials in various factors such as product cost,
supplying capacity, transportation cost, discount
scheme, and ordering cost (Li, Ventura, Venegas,
Kweon, & Hwang, 2018).
To fully assist the decision makers (DMs) in
allocating the order, another research design is to take
into account the inventory lot sizing and supplier
selection synchronously. The problem become more
complicated when the number of product and period
are multiple. DMs have to determine the optimal order
quantity of each product type in all periods in intention
of maximizing the profit as to minimize the total cost
(Salameh & Jaber, 2000).
This paper consist of a profit maximization lot
sizing and supplier selection problem where the
demand of multiple products is known over the
978-1-7281-4466-5/20/$31.00 ©2020 IEEE
Thanakorn Naenna
Department of Industrial Engineering,
Faculty of Engineering, Mahidol University
Nakhon Pathom, Thailand
thanakorn.nae@mahidol.ac.th
multiple periods planning horizon. The order quantity
of each product type can be placed to a set of suppliers.
The holding is product-dependent, and the ordering and
transportation cost are differed by various suppliers.
The DMs need to decide how many units of what
products to order from which suppliers in which
periods.
II. LITERATURE REVIEW
In 1913, the first lot sizing model is the renowned
Economic Order Quantity (EOQ), developed by Harris
(1913). Afterward, this problem has become popular
research topic rapidly, and it has long attracted the
attention of researchers. It was one of the first
applications of mathematical modeling to guide one in
making business decisions, and it has spawned
thousands of related studies over the past century that
have built on its major foundations and insights (Choi,
2013).
One of the major assumptions in EOQ model is
deterministic and stable. When it came to deterministic
and time-varying demand, the version of dynamic lot-
sizing was introduced next by (Wagner & Whitin,
1958). Subsequently, the model was extensively
developed by many researchers due to its prominence.
The comprehensive literature review on development
of lot-sizing problem and its solution approach could
be found in (Andriolo, Battini, Grubbström, Persona,
and Sgarbossa (2014); Brahimi, Absi, Dauzère-Pérès,
& Nordli, 2017; Glock, Grosse, & Ries, 2014).
Lot-sizing, although a very important problem in
operations management, is not an independent
problem. Integrating lot-sizing and supplier selection
implies making a joint decision on which products to
order in what quantities, and from which suppliers and
when (Rezaei, Davoodi, Tavasszy, & Davarynejad,
2016). Basnet and Leung (2005) presented a multiple-
period inventory lot-sizing scenario where multiple
products and multiple suppliers are taken into account.
A mixed integer programming is formulated, and
enumerative algorithm and heuristic algorithm are
proposed to overcome large problem. Also, Cárdenas-
Barrón, González-Velarde, and Treviño-Garza (2015)
proposed a new algorithm based on reduce and
optimize approach (ROA) and new valid inequality to
solve the same problem.
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 III. MATHEMATICAL MODELLING W Total storage capacity
M A large number
A. Model assumtions
The proposed inventory model in this study is Independent Decision Variable
formulated base on the following assumption. Number of product i ordered to supplier j
• Demand of product in each period are known over with price break k in period t
the finite planning horizon. Number of product i ordered to supplier j
• At most one order can be placed in each period, and with in period t
the entire ordered product are delivered at once in the Total purchasing quantity of product i in
beginning of the periods. period t
• Each supplier offers one of the quantity discounts (all Binary variable, set equal to 1 if purchase
unit discount/ incremental discount). quantity from supplier j in period t, 0
• Imperfect product rate are known. otherwise
• Imperfect product are sold in discounted price. Binary variable, set equal to 1 if purchase
• Ordering cost does not depend on the variety and quantity of produce i from supplier j with
quantity of product. price break k in period t, 0 otherwise
• Holding cost of product per period is product-
dependent. Dependent Decision Variable
• Transportation costs are known for each capacity of Expected beginning inventory level of
vehicle, and it is paid by the buyer. product i in period t
• The initial inventory level is zero. Expected ending inventory level of product
• Shortage is not allowed. i in period t
• The budget is used for covering ordering, purchasing Number of required vehicle from supplier j
and transportation costs, and it is limited. in period t
• The supplier capacity is limited.
• The warehouse has limited capacity.
C. Objective Function
B. Notation The net revenue will be maximize, and it is defined
Indices as the gross revenue minus all relevant cost. The
i index of product objective function, which aim to maximize the net
revenue, is formulated as follow:
j index of suppliers. Supplier j = 1,…j’
provide all-units quantity discount, and ( )=
supplier j = j’+1,…, J provide incremental
quantity discounts
t index of periods [(1 − )X
k index of price break
Parameters
+ X
Demand of product i in period t
Purchase cost of product i from supplier j
with price break k
The lower bound quantity of product i from −
supplier j with price break k
The upper bound quantity of product i from
supplier j with price break k
Imperfect rate of product i offered by −
supplier j in period t
Unit selling price per perfect unit of product
i − − −
( )
Unit selling price per imperfect unit of
product i
Holding cost of product i per period
Ordering cost from supplier j − (2 − ) − (1)
Transportation cost per vehicle form supplier 2
j
Vehicle capacity from supplier j The objective function as shown in (1) consists of
Capacity of supplier j in production of the gross revenue and the relevance cost which include
product i per period
Occupied space by product i in warehouse or purchasing cost, ordering cost, holding cost, and
vehicle transportation cost.
Maximum budget of buyer in period t

25
D. Constraints (8) is the buyer’s warehouse capacity constraint. In
equation (9), the total cost must not exceed the
X ≤ M × For all , , and (2) maximum budget. Equation (10) represent the supply
capacity of the supplier. The ending inventory must be
zero in equation (11). In constraint (12) & (16), the
≤X ≤ order quantity and number of vehicle must be integer.
For all , , , and Equation (13) & (15) are binary constraint. Constraint
(3)
(14) restrict that the ending inventory must be non-
negative.
U ≤ 1 For all , , and (4)
IV. DEVELOP GENETIC ALGORITHM
The Genetic Algorithm (GA) is developed to find
= + X For all i and t the near-optimal solution especially for large scale
(5)
problem. The general flow of Genetic Algorithm is
shown in Figure 1.
= − For all and (6)
∑ ∑ ∑ ∑ Initial population
≤ ≤ + 1
Evaluation
For all and (7)

Selection
≤ For all (8)

Crossover

P X
Mutation

No Yes
+ − ( ) Terminate? Stop

Figure 1. The general flow of Genetic Algorithm.

− +
+ (2 − )+ ≤ For all (9)
2 pair was crossed if the assigned random value is less
X ≤ For all , , and (10)
X − = 0 For all (11)
X ℕ ∪ (0) For all , , , and (12)
U = 0 1 For all , , , and successive generations. Moreover, to possibly obtain
(13)
≥ 0 For all and (14)
= 0 1 For all and (15)
ℕ ∪ (0) For all and (16)
In equation (2), buyer have to face the ordering cost
if the order is made. Equation (3) & (4) are used to
restrict that the ordered quantity must be in the interval
of price break quantity. The beginning inventory and
inventory balancing are shown in equation (5) & (6)
respectively. Equation (7) set the number of vehicle
which is used by the supplier in each period. Equation
In this study, the rank-based roulette wheel
selection method is adapted. The random value in the
range [0, 1] was generated and assigned for each pair
of parent chromosome, and the parent chromosome
than or equal to the crossover rate . In the proposed
GA, scattered crossover operator was employed. Some
of the genes which have the randomized value less
than or equal to mutation rate was mutated. Since
the Bit flip was used in this study, the selected genes
to be mutated was changed the value from 0 to 1 or 1
to 0. The solver time was not allowed to exceed 2
hours, or the algorithm is terminated when no further
development could be obtained in the solution after 50
good quality solution, the termination condition of 600
generations was used in this study.
A. Chromosome Representation
The chromosome is encoded as bianry value voctor
length of (IxT) which is marked by Y. The value of
gene equal to 1 if the order of product i is placed to
any supplier in period t. The structure of such a
chromosome is depicted in figure 2.
…
Figure 2. Chromosome structure

26
B. Parameter seting Somehow, various products is not provided the
same feature by one supplier as well as many different
There are three basic parameters of GA - crossover
suppliers. All these aspects are presented in Table IV
probability, mutation probability, and population size.
and Table V.
The size IxT is taken to find population size. The
parameter setting as shown in Table 1 is used in this Table IV. Supplier related data by product type
study.
Supplier Product Defective Rate Capacity
Table I. GA parameter setting
1 0.06 2601
Level 1
Factor 2 0.04 1343
1 2 3 1 0.06 2043
2
Cross rate ( ) 0.75 0.85 0.95 2 0.06 1706
Mutation rate ( ) 0.1 0.15 0.2 1 0.04 2198
3
Population size Double Triple Quadruple 2 0.04 1286
1 0.05 2724
V. NUMERICAL EXAMPLE 4
2 0.05 1554
A few number of instance have been generated to
test the model and evaluate the proposed GA. The first
Table V. The parameter related to buyer
problem involves two kinds of product being
purchased from some of four suppliers. The horizontal Period 1 2 3 4 5
plan is five periods. The value of all the parameter was Budget 17470 15804 14202 16464 18685
generated by using random number generation tool Warehouse 7000 7000 7000 7000 7000
built in Microsoft Excel. The products related data and
supplier related data are shown in below table. The MILP is encoded in optimization software
LING version 12, and GA is coded in software
Table II. Product related data MATLAB. The computational engine is Dell Inspiron
3442 (Intel core i5 with 4 GB of RAM). To evaluate
Product

the performance of using LINGO and GA to solve the

proposed model, a set of large-scale problem instance
1 2 3 4 5 are tested. The base case instance are extend by
1 2383 2185 2454 2072 2867 0.2 1 5 2.5 increasing the number of product (I), the number of
supplier (J), and the number of period (T). Table 2
2 1679 1956 1653 1595 1721 0.25 2 6 3
show all the problem size which was used to evaluate
and compare the capability problem solving approach
Table III. Supplier related data for all product types in this study.

J K ( , ) Table II. Problem size scenario

1 2
1 1 - 350 3.9 4.2 Problem Scenario Problem size
1 2 351 - 900 3.7 3.9 No. ID
179 34 1949
(All-unit) 3 901 - 1780 3.6 3.4 1 PB-1 4 4 4 5
4 1781 - Infinite 3.4 3.3 2 PB-2 4 4 4 10
1 1 - 500 3.9 4.1
3 PB-3 4 4 4 20
2 2 501 - 880 3.8 3.9
(All-unit) 250 35 1921 4 PB-4 5 8 4 10
3 881 - 1730 3.5 3.6
5 PB-5 5 8 4 20
4 1731 - Infinite 3.4 3.2
6 PB-6 5 8 4 30
1 1 - 440 3.7 4
203 30 1808 7 PB-7 10 8 4 20
3 2 441 - 930 3.4 3.7
(Incremental) 3 931 - 1530 3.3 3.3 8 PB-8 10 8 4 30
4 1531 - Infinite 2.8 2.9 9 PB-9 15 12 4 20
1 1 - 500 3.8 4.1 10 PB-10 15 12 4 30
4 2 501 - 840 3.3 3.6
182 30 1786 For GA approach, full factorial design of
(Incremental) 3 841 - 1520 3.1 3.4
experiment is done for all the parameter in table I to
4 1521 - Infinite 2.8 3.1 find the best parameter set for each problem size.

27
 VI. PERFORMANCE EVALUATION OF PROPOSED According to Table IV, the MILP which is encoded
GENETIC ALGORITHM in LINGO optimization software is capable to find the
optimal solution for the first two scenarios only, and
A. Genetic Parameter Selection
the solution time is increased exponentially when the
Each problem size was done the experiment on all problem size increase. The last 6 problem size was not
varies scenario of population size, crossover rate, and found the solution within 24 hours, so the lower bound
mutation rate. The best scenario which provides the of the solution was obtained.
highest value of objective in any problem size was
selected. The selected genetic parameters was shown C. Solution ending gap and solution gap
in Table III. The GA algorithm encoded in software MATLAB
could provide the near optimal solution within short
Table III. The selected genetic parameters period of time. The solution gap and computational
time improvement were presented in Table V.
Population Crossover Mutation
Scenario
size rate rate Table V. The performance of the proposed GA method
PB-1 20 0.85 0.15
PB-2 120 0.85 0.1 Ending Solution Computational
Scenario gap gap time improvement
PB-3 320 0.75 0.15 (%) (%) (%)
PB-4 240 0.85 0.2 PB-1 0 2.24 -114.00
PB-5 480 0.95 0.2 PB-2 0 2.21 88.48
PB-6 720 0.95 0.15 PB-3 2.38 6.93 99.58
PB-7 640 0.85 0.1 PB-4 1.11 2.73 99.86
PB-8 720 0.75 0.2 PB-5 100 9.98 99.80
PB-9 720 0.75 0.1 PB-6 100 8.09 99.75
PB-10 1080 0.85 0.15 PB-7 100 4.74 99.83
PB-8 100 3.05 99.50
B. Solution quality evaluation PB-9 100 3.78 99.42
The results obtained in the objective value (total net PB-10 100 6.87 99.06
revenue) and the solution time of the MILP and the
proposed GA method were presented in Table IV. Because the algorithm of the MILP approach
would test all choices of the decision, the solution time
Table IV. The results obtained of the MILP method is long for the large size problem, and it is different
and the proposed GA method from the GA method that randomly tests the
alternatives. In the other hand, if the problem size is
MILP results GA results large, the solution time of the MILP approach
increases exponentially based on the number of
Scenario

constraints while the proposed GA may be able finding

time (Sec)

time (Sec)
Objective

Objective
Solution

Solution
value

value

the feasible solution within short time. Figure 3 and

figure 4 respectively showed the solution gap and the
variation of LINGO computational time to GA
computational time.
PB-1 35465.45 (a) 48 34672.17 105
PB-2 71910.86 (a) 3080 70324.35 355
120
PB-3 144801.57 (b) 81732 134768.72 345
100
Error (%)

PB-4 90623.62 (b) 75902 88150.43 104

80
PB-5 187127.28 (c) 84672 168460.82 167 60
PB-6 285590.82 (c) 84672 262491.33 208 40
PB-7 374254.45 (c) 84672 356521.75 141 20
PB-8 551581.73 (c) 84672 534782.57 420 0
PB-9 545594.71 (c) 84672 524982.57 492
PB-10 866572.55 (c) 84672 807073.90 797
a The optimal solution. MILP(Ending gap)
b The best solution that found during solving 24 hours.
c The lower bound of the solution at 24 hours. GA (Relative error)

Figure 3. Ending gap and relative error

28
 100000
Computational time (Second)
90000
80000
70000
60000
50000
40000
30000
20000
10000
0 [2] Basnet, C., & Leung, J. M. Y. (2005). Inventory lot-sizing with
1 2 3 4 5 6 7 8
MILP Computational Time
GA Computational Time
Figure 4. The solution time of the MILP and
proposed GA
VII. CONCLUSION
This research addresses the problem of
coordinating lot-sizing and supplier selection
problems with its objective of maximal net profit. This
problem constantly faces three decision problems that
are usually treated separately in the literature and are
mostly led to heuristic solutions. Therefore, this
research aims to answer the following questions: (1)
When is the right time to purchase the product? (2)
How many unit of product should be purchased in any
specific period? (3) From which supplier should the
firm place the order? To answer these questions, the
research is broken down to two phases. The first phase
focuses on analytical definition on the research
problem and mathematical modeling. The second
phase is to develop the meta-heuristics solution
approach that can solve problem in practical size.
Experiments on large-scale problems show that
directly solving the mathematical model takes a
prohibitively long computation time. Therefore, the
second phase is focused on developing an efficient
meta-heuristic solution approach namely Genetic
Algorithm. The algorithm is coded in software
MATLAB. In this dissertation, the parameter setting is
adapted from the previous well known publication.
The effort of GA do achieve solution feasibility for all
problem size in this research. With experiments on the
same simulated problem instances, the net revenue is
slightly decreased in GA, but the computational time
is must faster than the exact approach. Compared to
the commercial solver LINGO, the meta-heuristic
approach is more effective and efficient.
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