VIETNAM NATIONAL UNIVERSITY – HOCHIMINH CITY

INTERNATIONAL UNIVERSITY
DEPARTMENT OF INDUSTRIAL ENGINEERING &
MANAGEMENT

A new approach to solve the multi-product multi-

period inventory lot sizing with supplier selection
problem

INVENTORY MANAGEMENT COURSE

Lecturer: Dr. Nguyen Van Hop

Group Number: 7
Class: 4

Student ID Member name % Contribution

IELSIU19206 Nguyễn Quỳnh Nga 100%
IELSIU19207 Đinh Thị Kiều Nga 100%
IELSIU19189 Đỗ Hoàng Trúc Linh 100%
IELSIU19155 Phan Trung Hiếu 70%

December 31, 2021

 ABSTRACT

In a competitive industry with supply chain unpredictability, it is critical to have strong

operation planning and replenishment control through effective inventory management.

Furthermore, selecting the proper suppliers — those who can consistently supply the

correct products (or raw materials) at the right price, on time, in the right numbers, and

with the right quality – is critical. As a result, each corporation must deal with various

items, multiple periods, and multiple suppliers.

The main focus of this paper is finding optimised methods to reduce the inventory aging in

inventory management which directly reduces the cost. The reduction in cost will be a

great competitive advantage for the company to have in this competitive market. The

multiple products-multiple periods and multiple suppliers problem is solve by using the

ILP Model and conducted some ananlysis to rank the effects of changing parameters on

the total cost. As a result, the company may make plan and some potential strategies to run

the business.

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 TABLE OF CONTENTS

Chapter Page

ABSTRACT ..........................................................................................................................ii
TABLE OF CONTENTS .................................................................................................... iii
CHAPTER 1 INTRODUCTION ....................................................................................... 1
1.1 System Description ................................................................................................ 1
1.2 Problem statement .................................................................................................. 2
1.3 Scope and Limitations ............................................................................................ 2
CHAPTER 2 BACKGROUND AND LITERATURE REVIEW ..................................... 3
2.1 Lot sizing ................................................................................................................ 3
2.2 Inventory lot sizing and supplier selestion ............................................................. 3
CHAPTER 3 METHODOLOGY ...................................................................................... 4
3.1 Mathematical model formulation ........................................................................... 4
3.2 Problem descriptions .............................................................................................. 4
3.3 Algorithm (If any) .................................................................................................. 5
CHAPTER 4 RESULTS.................................................................................................... 7
4.1 Data collection........................................................................................................ 7
4.2 Result Presentation ................................................................................................. 7
4.3 Sensitivity analysis ............................................................................................... 12
CHAPTER 5 CONCLUSION ......................................................................................... 18
REFERENCES ................................................................................................................... 19

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 CHAPTER 1 INTRODUCTION

Supplier selection and lot sizing are essential activities in supply chain management. It
is important to choose the best suppliers for products, lot sizes and order time. The
main goal of combining lot sizing and supplier choice decisions is to minimize costs as
well as maximize service levels.

It has been a popular topic in both the academic and practical fields for decades that
has attracted many researchers with a variety of approaches. The multi-product multi-
period inventory lot sizing with supplier selection problem can be represented as a
mixed integer linear programming (MILP) model to make optimal decisions in
selecting suppliers and determining the lot size of products in the appropriate time
period with minimal inventory costs.

The given research paper mainly improves the work of Basnet and Leung (2005) by
two methods, that is CPLEX and a new approach based on the reduce and optimize
approach (ROA). In the working process, we found that the optimization problem can
be formulated as an integer linear programming model (ILP). Therefore, we decided to
use the ILP model.

1.1 System Description

Basnet and Leung (2005) solved the problem with an exhaustive enumerative search
algorithm. Since this algorithm is not processed fast enough for real cases of
complicated problems, they proposed a heuristic algorithm with a more reasonable
computation time.

The inventory lot sizing and supplier selection problem of Basnet and Leung (2005) is
a complex combinatorial NP hard optimization problem in which Heuristics or
approximation algorithms is the key factor to solve it. For this reason, this study
provides a quality solution for the multi-product multi-period inventory lot sizing with
supplier selection problem in a shorter calculation period.

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1.2 Problem statement
This paper presents the multi-product multi-period inventory lot-sizing with the
supplier selection problem. We consider the case when the deterministic demand for
several discrete products is known over time and the deterministic demand for each
product is known across a finite time horizon. Each product can be offered and
supplied by a single or several suppliers. In the case of a contract with a supplier, it is
necessary to pay the ordering cost. Holding cost per period is charged for each product
if the company retains goods in the warehouse for an extended length of time. The
warehouse capacity is unlimited and must not be out of stock. The decision maker
needs to decide the optimal solution for the selection of suppliers and lot size for each
of them in specific periods to reduce overall cost and maximum profits.

1.3 Scope and Limitations

Assumptions

Demand of products in periods is known.

Shortage and backordering is not allowed.

No limit storage capacity.

The holding cost of the product in each period depends on the product.

Ordering cost from supplier does not depend on the variety and quantity of products
involved.

Initial inventory of the first period and the inventory at the end of the last period are
assumed to be zero.

The unit price is different and depends on the supplier.

Lead-time is assumed to be zero.

Scope

In this study, our group considers the case of a company which plans to order three
product categories from five best suppliers to its warehouse. Each type of the product
may be offered by more than one supplier. In addition, we also assume the demand for
12 periods as well as the holding cost for each product and the ordering cost for each
supplier.

Limitations

The model is built on ideal conditions. Thus, if one of the given assumptions is not
met, the model may fail or give unreasonable results. Furthermore, all data are
randomly generated so the results of the analysis may not be very reliable.

2
 CHAPTER 2 BACKGROUND AND LITERATURE REVIEW

To effectively manage inventory, reduce costs and increase service levels, it is

necessary to use the right mathematical model to solve the problem. If it is a complex
combinatorial NP hard optimization problem, using Heuristic tools is necessary.

2.1 Lot sizing

Lot size basically refers to the total quantity of a product ordered for manufacturing.
Determining the appropriate lot size is necessary to maintain acceptable service and
inventory levels. If the size is too large, it can increase the holding cost; however, if the
size is too small, it may lead to shortage. Thus, the person in charge of ordering has to
trade-off between costs to find the optimal order quantity. Lot sizing is an important
step in selecting the optimal supplier to get the best product in the right amount and the
time to place the orders during a finite planning horizon.

2.2 Inventory lot sizing and supplier selection

One of the decisions that affects all companies is supplier selection. This is found to be
crucial and is closely related to lot sizing. By considering a multi-period horizon,
managers have to decide carefully how many suppliers they need for a particular
operation. They have to choose the suppliers who can provide the right products with
the right quality, in the right quantity, at the right time and at the right price. The
combination of supplier selection and order sizing are two activities that are
significantly decisive for reducing total costs and increasing service levels.

The single-product multi-period inventory lot sizing problem has its origins at the end
of the 1950s and was first proposed by Wagner and Whitin (1958). Then many
researchers in turn joined with different approaches to solve the lot sizing problem that
have been developed for distinct applications. Then a new research direction was
exploited, i.e the multi-product multi-period inventory lot sizing with supplier
selection problems. They focus on determining the order sizing policy while selecting
suppliers in definite periods. The evaluation of suppliers needs to be based on specific
criteria. Many researchers have paid more attention to these criteria. A study selected
the best suppliers and established optimal quantity from the chosen suppliers by
considering both tangible and intangible procedure as well as time. More recently, a
research paper presents a fuzzy multi-criteria group decision making methodology for
supplier selection.

Basically, multiple suppliers are used when no single supplier can satisfy all of a
buyer's needs due to performance constraints or avoid depending on a single source to
eliminate shortages and maintain stable competition among suppliers. To be effective,
it is necessary to simultaneously select suppliers and allocate order quantities.

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 CHAPTER 3 METHODOLOGY

3.1 Mathematical model formulation

3.2 Description
The objective function (1) is the total cost that is incurred by the buyer and comprises
the total purchase cost of the products, the total ordering cost, and the total holding
cost for carrying inventory in each period.
Constraints (2) ensure that all demand is satisfied in the period in which it occurs;
these constraints also guarantee avoiding shortages.

4
Constraints (3) establish that it is not possible to place an order without charging a
corresponding ordering cost.
Constraints (4) define the binary variables.
Constraints (5) impose non-negativity conditions on the remaining decision
variables.
The mathematical formulation (1) to (5) can only be solved to optimality by
commercial integer linear programming solvers for small instance sizes.

3.3 Algorithm (If any)

//Indices
int NumProducts = ...; //Number of products
int NumSuppliers = ...; //Number of suppliers
int NumPeriods = ...; //Number of periods
range Products = 1..NumProducts; //Classify products
range Suppliers = 1..NumSuppliers; //Classify suppliers
range Periods = 1..NumPeriods; //Classify periods
//Parameters
int D[Products][Periods] = ...; //Demand for product i in period t
float P[Products][Suppliers] = ...; //Purchase price for product i from
supplier j
float H[Products] = ...; //Holding cost for product i per period t
float O[Suppliers] = ...; //Ordering cost for supplier j
//Decision variables
dvar int X[Products][Suppliers][Periods]; //Lot size for product i ordered
from supplier j in period t
dvar boolean Y[Suppliers][Periods]; //Check if order is placed to supplier j
or not (1:yes and 0:No)
//Objective function
minimize
sum(i in Products, j in Suppliers, t in Periods)P[i][j]*X[i][j][t] + //Total
purchase cost of products
sum(j in Suppliers, t in Periods)O[j]*Y[j][t] + //Total ordering cost
sum(i in Products, t in Periods)H[i]* //Total holding cost for carrying
inventory in each period
(sum(k in Periods : k<=t, j in Suppliers)X[i][j][k] - sum(k in Periods :
k<=t)D[i][k]);
//Constraints
subject to{
//Constraint 1:
forall(i in Products, t in Periods){
sum(k in Periods : k<=t, j in Suppliers) X[i][j][k] - sum(k in Periods :
k<=t)D[i][k]>= 0;
}
//Constraint 2:
forall(i in Products, j in Suppliers, t in Periods){
(sum(k in Periods: k >= t)D[i][k])*Y[j][t]-X[i][j][t] >=0;
}
//Constraint 3:
forall(j in Suppliers, t in Periods)
(Y[j][t]==0) || (Y[j][t]==1);
//Constraint 4:
forall(i in Products, j in Suppliers, t in Periods)
X[i][j][t]>=0;
}

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SheetConnection
my_sheet("C:\\Users\\ADMIN\\Desktop\\cplex\\ProjectData.xlsx");
NumProducts from SheetRead(my_sheet, "'alldata'!B2");
NumSuppliers from SheetRead(my_sheet, "alldata!B3");
NumPeriods from SheetRead(my_sheet,"alldata!B4");
D from SheetRead(my_sheet,"alldata!B6:M8");
P from SheetRead(my_sheet,"alldata!B10:F12");
H from SheetRead(my_sheet,"alldata!B15:D15");
O from SheetRead(my_sheet,"alldata!B17:F17");

6
 CHAPTER 4 RESULTS

4.1 Data collection

Number of Products 3
Number of Suppliers 5
Number of Periods 12
Figure 1: Indices tables about number of products, number of suppliers and number
of periods.

Periods 1 2 3 4 5 6 7 8 9 10 11 12
Product 1 230 1750 650 1410 2950 1160 990 2650 540 270 710 1070
Product 2 465 1510 2410 515 1850 1055 740 1705 1620 2115 830 765
Product 3 500 700 300 800 1000 600 800 900 1100 300 700 400
Figure 2: Demand of three products over a planning horizon of 12 periods (Dij).

Ordering cost ($)

Supplier 1 250
Supplier 2 220
Supplier 3 235
Supplier 4 210
Supplier 5 195
Figure 3: Ordering cost required by
each supplier

Holding cost ($)

Product 1 0.11
Product 2 0.11
Product 3 0.15
Figure 4: Holding cost of three
products

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 Supplier 1 Supplier 2 Supplier 3 Supplier 4 Supplier 5
Product 1 2 8 7 7 9
Product 2 4 6 5 4 5
Product 3 7 4 5 3 4
Figure 5: Purchase price (unit price) of products by each of five suppliers

4.2 Result Presentation

The result from CPLEX:

Products Suppliers Periods

(size 3) (size 5) (size 12)
1 1
1 1
1 1
1 1
1 1
1 1
1 1
1 1
1 1
1 1
1 1
1 1
1 2
1 2
1 2
1 2
1 2
1 2
1 2
1 2
1 2
1 2
1 2
1 2
1 3
1 3
1 3
1 3
1 3
1 3
1 3
1 3
Value
1 230
2 2400
3 0
4 1410
5 2950
6 2150
7 0
8 3190
9 0
10 980
11 0
12 1070
1 0
2 0
3 0
4 0
5 0
6 0
7 0
8 0
9 0
10 0
11 0
12 0
1 0
2 0
3 0
4 0
5 0
6 0
7 0
8 0
8
1 3 9 0
1 3 10 0
1 3 11 0
1 3 12 0
1 4 1 0
1 4 2 0
1 4 3 0
1 4 4 0
1 4 5 0
1 4 6 0
1 4 7 0
1 4 8 0
1 4 9 0
1 4 10 0
1 4 11 0
1 4 12 0
1 5 1 0
1 5 2 0
1 5 3 0
1 5 4 0
1 5 5 0
1 5 6 0
1 5 7 0
1 5 8 0
1 5 9 0
1 5 10 0
1 5 11 0
1 5 12 0
2 1 1 0
2 1 2 1510
2 1 3 0
2 1 4 515
2 1 5 1850
2 1 6 1055
2 1 7 0
2 1 8 1705
2 1 9 0
2 1 10 2115
2 1 11 0
2 1 12 765
2 2 1 0
2 2 2 0
2 2 3 0
2 2 4 0
2 2 5 0
2 2 6 0
9
2 2 7 0
2 2 8 0
2 2 9 0
2 2 10 0
2 2 11 0
2 2 12 0
2 3 1 0
2 3 2 0
2 3 3 0
2 3 4 0
2 3 5 0
2 3 6 0
2 3 7 0
2 3 8 0
2 3 9 0
2 3 10 0
2 3 11 0
2 3 12 0
2 4 1 465
2 4 2 0
2 4 3 2410
2 4 4 0
2 4 5 0
2 4 6 0
2 4 7 740
2 4 8 0
2 4 9 1620
2 4 10 0
2 4 11 830
2 4 12 0
2 5 1 0
2 5 2 0
2 5 3 0
2 5 4 0
2 5 5 0
2 5 6 0
2 5 7 0
2 5 8 0
2 5 9 0
2 5 10 0
2 5 11 0
2 5 12 0
3 1 1 0
3 1 2 0
3 1 3 0
3 1 4 0
10
3 1 5 0
3 1 6 0
3 1 7 0
3 1 8 0
3 1 9 0
3 1 10 0
3 1 11 0
3 1 12 0
3 2 1 0
3 2 2 0
3 2 3 0
3 2 4 0
3 2 5 0
3 2 6 0
3 2 7 0
3 2 8 0
3 2 9 0
3 2 10 0
3 2 11 0
3 2 12 0
3 3 1 0
3 3 2 0
3 3 3 0
3 3 4 0
3 3 5 0
3 3 6 0
3 3 7 0
3 3 8 0
3 3 9 0
3 3 10 0
3 3 11 0
3 3 12 0
3 4 1 1200
3 4 2 0
3 4 3 1100
3 4 4 0
3 4 5 1600
3 4 6 0
3 4 7 1700
3 4 8 0
3 4 9 1400
3 4 10 0
3 4 11 1100
3 4 12 0
3 5 1 0
3 5 2 0
11
 3 5
3 5
3 5
3 5
3 5
3 5
3 5
3 5
3 5
3 5
3 0
4 0
5 0
6 0
7 0
8 0
9 0
10 0
11 0
12 0

Periods 1 2 3 4 5 6 7 8 9 10 11 12 Total
Product 1 230 1750 650 1410 2950 1160 990 2650 540 270 710 1070
Inventory 0 650 0 0 0 990 0 540 0 710 0 0 2890
Supplier 1 230 2400 1410 2950 2150 3190 980 1070 14380
Supplier 2
Supplier 3
Supplier 4
Supplier 5
Product 2 465 1510 2410 515 1850 1055 740 1705 1620 2115 830 765
Inventory 0 0 0 0 0 0 0 0 0 0 0 0 0
Supplier 1 1510 515 1850 1055 1705 2115 765 9515
Supplier 2
Supplier 3
Supplier 4 465 2410 740 1620 830 6065
Supplier 5
Product 3 500 700 300 800 1000 600 800 900 1100 300 700 400
Inventory 700 0 800 0 600 0 900 0 300 0 400 0 3700
Supplier 1
Supplier 2
Supplier 3
Supplier 4 1200 1100 1600 1700 1400 1100 8100
Supplier 5

Total cost = Ordering Cost + Holding Cost + Purchasing Cost

• Product 1:
Total cost = 8x250 + 2890x0.11 + 14380x2 = $31077.9
• Product 2:
Total cost = 7x250 + 5x210 + 0 + 9515x4 + 6065x4 = $65120
• Product 3:
Total cost = 6x210 + 3700x0.15 + 8100x3 = $26115
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=> Total cost of three products = $31077.9 + $65120 + $26115 = $122312.9

4.3 Sensitivity analysis

The problem parameters were varied including five factors: Demand, Purchasing cost,

Ordering cost, and holding cost with the change rate from 0.2 to 1.8 with each step of

0.2. The objective of this is to examine the influence of 4 parameters on the result.By

comparing the results of current optimal solutions to the solutions when parameters are

adjusted, the gap in the optimal solution can be founded and we can rank the level of

influence of each parameter being changed.

4.3.1 Effect of demand (D) change:

Demand change New optimal Gap in optimal Gap in optimal

rate solution solution (unit) solution (%)

0.2D 26852.34 -95460.56 -78.04619

0.4D 51131.38 -71181.52 -58.19625

0.6D 74926.48 -47386.42 -38.74196

0.8D 98774.44 -23538.46 -19.24446

D 122312.9 0 0

1.2D 145563.5 23250.6 19.00912

1.4D 168814.1 46501.2 38.01823

1.6D 192261.3 69948.4 57.18808

1.8D 215276.2 92963.3 76.00449

Figure 6: Effect of demand (D) change

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=> The average difference is 42.71%, which shows a significant effect of demand
change on the total cost.

4.3.2 Effect of P (purchasing cost) change

Purchasing cost New optimal Gap in optimal Gap in optimal

change rate solution solution (unit) solution (%)

0.2P 30198.9 -92114 -75.31013

0.4P 53938.9 -68374 -55.90089

0.6P 77336.9 -44976 -36.77126

0.8P 100734.9 -21578 -17.64164

P 122312.9 0 0

1.2P 147530.9 25218 20.61761

1.4P 170928.9 48616 39.74724

1.6P 194326.9 72014 58.87686

1.8P 217724.9 95412 78.00649

Figure 7: Effect of P (purchasing cost) change

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=> The average difference is 42.54%, which shows a significant effect of purchasing
cost change on the total cost.

4.3.3 Effect of H (holding cost) change

Ordering cost change New optimal Gap in optimal Gap in optimal

rate solution solution (unit) solution (%)

0.2H 119156.3 -3156.6 -2.580758

0.4H 120569.4 -1743.5 -1.425442

0.6H 121038.5 -1274.4 -1.041918

0.8H 121880.8 -432.1 -0.353274

H 122313.9 0 0

1.2H 122487.5 174.6 0.142749

1.4H 122702.1 389.2 0.3182

1.6H 122790.6 477.7 0.390556

1.8H 122932.2 619.3 0.506324

Figure 8: Effect of H (holding cost) change

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=> The average difference is 0.75%, which shows an insignificant effect of holding
cost change on the total cost.

4.3.4 Effect of O (ordering cost) change:

Ordering cost New optimal Gap in optimal Gap in optimal

change rate solution solution (unit) solution (%)

0.2O 117081.7 -5231.2 -4.2769

0.4O 118559.5 -3753.4 -3.068687

0.6O 119879.9 -2433 -1.989161

0.8O 121100.9 -1212 -0.990901

O 122312.9 0 0

1.2O 123524.9 1212 0.990901

1.4O 124258.6 1945.7 1.590756

1.6O 124520.8 2207.9 1.805124

1.8O 125390.8 3077.9 2.516415

Figure 9: Effect of O (ordering cost) change

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=> The average difference is 1.91%, which shows an insignificant effect of ordering
cost change on the total cost.

Parameter Average difference Rank

Demand (D) 42.71% 1

Purchasing cost (P) 42.54% 2

Ordering cost (O) 1.91% 3

Holding cost (H) 0.75% 4

In conclusion, on the basis of the average difference of changing parameters, the

demand (D) and purchasing cost (P) have a significant impact on the total cost, which

are 42.71% and 42.54% respectively. Otherwise, the ordering cost (O) and holding

cost (H) have a low effect on the total cost.

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 CHAPTER 5 CONCLUSION

In this project, the multi-product multi-period inventory lot sizing with supplier

selection problem was solved by using a new algorithm and the target to minimise the

total cost. We formulated the optimization problem as Integer Linear Programming

Model (ILP) and put them through CPLEX. It is observed that solutions for large-sized

problems can not be obtained using CPLEX. Therefore, the developed heuristic

algorithm is more efficient and useful to solve large-size problems and the

performance of this algorithm is very satisfactory.

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 REFERENCES

[1] Leopoldo Eduardo Cárdenas-Barrón, José Luis GonzálezVelarde, Gerardo Treviño-

Garza, “A
new approach to solve the multi-product multi-period inventory lot sizing with
supplier selection
problem”, Computers & Operations Research,
http://dx.doi.org/10.1016/j.cor.2015.06.008

[2] What is CPLEX? - IBM Documentation

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