DATA DRIVEN APPROACHES

FOR OPTIMAL ORDER

QUANTITY IE–797
Submitted By: -
Krishna Gupta – 183190014
Pankaj Kumar Sahu – 183190013
TYPES OF DEMANDS

• Deterministic Demand
1. Static Demand
2. Dynamic Demand
• Probabilistic Demand
1. Stationary Demand
2. Non-Stationary Demand
INVENTORY MODELS
• Types of Inventory Models
1. Deterministic Demand Inventory Models
- Annual Demand is known priory
2. Probabilistic Demand Inventory Models
- Stochastic Demand with known Distribution
- Stochastic Demand with unknown Distribution
1. DETERMINISTIC DEMAND INVENTORY MODELS

Type-1(a): - Basic Economic Order Quantity (EOQ) models/Infinite rate

replenishment model  Inventory
Level
Total Annual Cost Maximum Inventory Level
= Purchase cost + ordering cost 𝑄  𝑚𝑎𝑥
𝑑
+ holding cost  
Average Inventory Level

 Total Inventory Cost    

= Reorder Level
 
 Economic Order Quantity Time

𝑇 𝐿
   𝑡
Fig. 1: Inventory level vs. Time [3]
1. DETERMINISTIC DEMAND INVENTORY MODELS

Type-1(b): - Economic Order Quantity (EOQ) model with Shortage

Total Annual Cost  Inventory
Level
= Purchase cost + ordering cost
𝑄−
  𝑆
+ holding cost + shortage cost
𝑑 
 Total Inventory Cost  
=    
𝑄  Time

 
 Economic Order Quantity
𝑆
  𝑇 
Fig 2: Inventory level vs. Time [4]
2. PROBABILISTIC DEMAND INVENTORY MODELS

• Type-2(a): - Classical Newsvendor Model

- It is a type of model in which demand distribution is known priory
- At every time period either underage cost or overage cost occur
- To minimize total cost there is a trade off between underage cost
and overage cost
- Routinely decisions are made according to law of large number to
minimize total expected cost [6]
TYPE-2(A): - CLASSICAL NEWSVENDOR MODEL

•  Cost per period = Underage cost + Overage Cost Cost

EO
Q
• Total cost (q, D) = h *max (0, q-D) + b *max (0, D-q) Mini
mum
Cost
• Total cost (q) = E [h *max (0, q-D) + b*max (0, D-q)]
Stocking
  Quantity
• Total cost (q) = Q*

Fig. 3: Newsvendor Expected

cost [4]
2. PROBABILISTIC DEMAND INVENTORY MODELS

• Type-2(b): - Sample Average Approximation Model

- It is a Non-parametric data driven model with unknown demand
distribution
- In this model it is considered that demand follows Empirical
Discrete Uniform Distribution
- In this we compare expected newsvendor cost when OOQ is
calculated from known distribution and Empirical Distribution
TYPE-2(B): - SAA MODEL (NON -
PARAMETRIC APPROACH)
••  SAA Expected Cost: -

• SAA Optimal Order Quantity: -

SAA MODEL

•  Probability Bounds for SAA accuracy

• ∈ ⊆ Sϵ
• where , is known as right one sided
and left one sided derivatives respectively
• Where is relative regret

 Fig. 4: Levi optimal interval size [1]

SAA MODEL
•  Theorem 1: - (LRS Bound, Levi et al. 2007). Consider the newsvendor problem with
underage cost b > 0 and overage cost h > 0. Let be the SAA solution with sample
size N. For a given > 0, the SAA solution with sample size N is - optimal with
probability at least [1]

• Theorem 2: - (Improved LRS Bound) (Based upon theorem 1 statement) [1]

SAA MODEL
•  Weighted Mean Spread Bound
- This bound is reducing the sample size significantly with slight decrease
in probability as compare to Improved LRS and Levi bounds.
• is second order Taylor series approximation of C
around optimal order quantity

• ; where at ,

Fig. 5 WMS interval size [1]

 WEIGHTED MEAN SPREAD (WMS) ()
BOUND
•  Assumptions: - For given (b,h), ∈ consideration of is decreasing for allis required.

• SAA empirical cdf is biased proportional to amount

• Theorem 3: - (Distribution-Dependent Bound) for a given (b, h) will be optimal

with under the assumption that is decreasing for all will be optimal with
probability at least [1]
WMS BOUND
•  Absolute Mean Spread
• Lower bound on WMS for Log-Concave Distribution

• The solution to the optimization problem is given by

THREE POINT DISTRIBUTION (TPD) (NON
- PARAMETRIC) APPROACH
•  
• Preposition: - If a nonnegative random variable (demand vector) with mean and
standard deviation and normalized semi variance then the bounds on is given by
[2]
MINIMUM EXPECTED TPD PROFIT

••  The linear Mean, Variance, Semivariance (MVS) is defined as

TPD APPROACH
•• Theorem-1:
  - Consider the newsvendor model where the exact demand distribution is
unknown, but the mean m, standard deviation , and normalized semivariance s are
known. Given this information, the worst-case expected newsvendor profit with the
mean, variance, and Semivariance information for the order quantity q is [2]

• Theorem 2: - semivariance solution for distributionally robust newsvendor problem

for mean m > 0, semivariance s ∈ (, 1) with mean m > 0 , standard deviation > 0 where
F is the set of all non-negative demand distribution is given below with the help of
critical ration we can found the ordering quantity for worst expected profit [2]
BEST DISTRIBUTION FIT APPROACH
• In
  this approach, on given demand data points the best distribution is fitted with the
help of Kolmogorov-Smirnov (KS) test
• Then best distribution newsvendor cost is compared with SAA cost.

• Hypothesis for K-S Test [5]

OBSERVATIONS &
RESULTS
SENSITIVITY OF SAA OOQ TO NEWSVENDOR OOQ
FOR DIFFERENT DISTRIBUTION WITH VARYING
SAMPLE SIZE AND FIXED NO. OF SAMPLES

 𝑵 ( 𝛍=𝟏𝟎𝟎 , 𝛔 =𝟓𝟎)  𝑷 ( 𝛍=𝟏 ,𝛔 =𝟏 . 𝟓)

SENSITIVITY OF SAA OOQ TO NEWSVENDOR OOQ
FOR DIFFERENT DISTRIBUTION WITH VARYING NO.
OF SAMPLES AND FIXED SAMPLE SIZE

 𝒆𝒙𝒑 (𝛍=𝟏𝟎𝟎) 𝑼
  ( 𝑨=𝟎 , 𝑩=𝟏𝟎𝟎 )
 MINIMUM REQUIRED SAMPLE SIZE USING VARIOUS
PROBABILISTIC BOUND FOR NORMAL DISTRIBUTION
Sample Size for various Distributions using SAA Approach

S. No. Relative Probabilit N_LRS N_LRS Probabilit N_WMS

Regret y LRS Improve y WMS
d

Normal Distribution

1 0.02 0.762 2394711 966399 0.712 3876

2 0.04 0.902 848232 345325 0.772 2172

3 0.06 0.958 482905 198313 0.875 1849

4 0.08 0.978 317100 131350 0.937 1729

5 0.10 0.989 234136 97817 0.966 1630

 MINIMUM REQUIRED SAMPLE SIZE USING VARIOUS
PROBABILISTIC BOUND FOR UNIFORM DISTRIBUTION
Sample Size for various Distributions using SAA Approach

S. No. Relative Probabilit N_LRS N_LRS Probabilit N_WMS

Regret y LRS Improved y WMS

Uniform Distribution

1 0.02 0.846 2991668 1164034 0.762 4258

2 0.04 0.963 1093312 456854 0.942 3541

3 0.06 0.985 575647 251167 0.986 3308

4 0.08 0.993 372538 164702 0.996 3108

5 0.10 0.995 254475 112640 0.999 2556

 
DECREASE IN SAMPLE SIZE ON COST OF REDUCTION
IN OPTIMAL SOLUTION PROBABILITY
Normal Distribution

Relative Regret Decrease in Probability (%) Decrease in Sample size (%)

0.02 6.98 99.60

0.04 14.41 99.37

0.06 8.66 99.07

0.08 4.19 98.68

0.10 2.33 98.33

COMPARISON OF SAA SOLUTION WITH
DISTRIBUTION FIT SOLUTION

 𝑵 ( 𝛍=𝟏𝟎𝟎 , 𝛔 =𝟓𝟎)  𝒆𝒙𝒑 (𝛍=𝟏𝟎𝟎)

COMPARISON OF SAA SOLUTION WITH
DISTRIBUTION FIT SOLUTION

  {𝟏𝟎𝟎 , 𝟓𝟎𝟎 , 𝟏𝟎𝟎𝟎 } , 𝛔= {𝟏𝟎𝟎 , 𝟏𝟎𝟎 , 𝟏𝟎𝟎 } , 𝒑𝒓 = 𝟓 , 𝟑 , 𝟏

 𝒆𝒙𝒑 (𝛍=𝟏𝟎𝟎) 𝛍= {𝟗 𝟗 𝟗 }
COMPARISON OF SAA COST WITH
DISTRIBUTION FIT COST

  {𝟏𝟎𝟎 , 𝟓𝟎𝟎 , 𝟏𝟎𝟎𝟎 } , 𝛔= {𝟏𝟎𝟎 , 𝟏𝟎𝟎 , 𝟏𝟎𝟎 } , 𝒑𝒓 = 𝟓 , 𝟑 , 𝟏

 𝒆𝒙𝒑 (𝛍=𝟏𝟎𝟎) 𝛍= {𝟗 𝟗 𝟗 }
CUMULATIVE SAA EXPECTED REGRET
OVER PERIOD OF TIME
COMPARISON OF PROFIT BETWEEN SAA &
MVS

 𝒆𝒙𝒑 (𝛍=𝟏𝟎𝟎)  𝑵 ( 𝛍=𝟏𝟎𝟎 , 𝛔 =𝟓𝟎)

COMPARISON OF PROFIT BETWEEN
NEWSVENDOR, SAA, MV & MVS

 𝑵 ( 𝛍=𝟏𝟎𝟎 , 𝛔 =𝟓𝟎)  𝒆𝒙𝒑 (𝛍=𝟏𝟎𝟎)

ANALYSIS ON DATA
FROM INDUSTRY
DATA DESCRIPTION

• Total 39754 products demands over a period of 54 months

• For 22578 products there were no demands over 54 months
• Analysis done on some products for which at least 70% of the
times non-zero demand occur
• No. of products fall in the range of 70-80%, 80-90% & 90-100%
are 51, 52 & 25 respectively.
DATA DESCRIPTION
 MODEL FORMULATION
Cost
• Total Cost = holding cost + shortage cost + ordering cost + purchase cost Total Annual
Cost
Total Inventory
Cost
• Ordering cost = (ordering cost/vehicles)*no. of vehicles
• No. of vehicles = ceiling(quantity ordered/quantity per vehicle)

• Ordering cost/vehicles = min(100, 10*purchase cost of product)

Holding
• Holding cost = interest rate/month* unit price of product * (quantity held Cost

for that month) Purchase

Cost

• Shortage cost = units short in that month * (selling price of the product -
Ordering
Cost
cost price of the product)
∗ Stocking
• Purchase cost  = purchase cost/unit * number of units purchased in the  𝑄 Quantity

review period  Fig 7: Variation of Costs with Quantity [9]

INVENTORY VARIATION FOR A PRODUCT FALLING IN
90-100% DEMAND OCCURANCE OVER DIFFERENT
QUANTILE {PRODUCT = “A24401”}
COPARISON OF SAA COST WITH BEST FIT COST FOR
90-100% DEMAND OCCURANCE FOR PRODUCTS
{PRODUCT = “A24401”}
INVENTORY VARIATION FOR A PRODUCT FALLING IN
80-90% DEMAND OCCURANCE OVER DIFFERENT
QUANTILE {PRODUCT = “A44”}
COPARISON OF SAA COST WITH BEST FIT COST FOR
80-90% DEMAND OCCURANCE FOR PRODUCTS
{PRODUCT = “A44”}
INVENTORY VARIATION FOR A PRODUCT FALLING IN
70-80% DEMAND OCCURANCE OVER DIFFERENT
QUANTILE {PRODUCT = “A150”}
COPARISON OF SAA COST WITH BEST FIT COST FOR
70-80% DEMAND OCCURANCE FOR PRODUCTS
{PRODUCT = “A150”}
MARKOV DECISION PROCESS (MDP)
•  A Hidden Markov Model (HMM) can be found in Sparse demand data.
• Notations: -
– decision epochs – action set – transition probability
– state of the system – reward  

• MDP is defined as the collection of objects .

UNDERLYING MDP FOR INVENTORY
CONTROL PROBLEM
   
Start of month Start of month

Order stock arrives  

External Demand in
month

  Fill orders
Order units of stock

 Stock in hand  
Stock in hand

Fig. 6: Timing of Events in inventory models [7]

PORTABLE MODULES PROBLEM

(a) Move Modules

(0) Initial State (1) Post-Module Movement State

Demand Region
(c) Fill Demand
Location

Inventory Position

Mobile Module

(2) Post-Replenishment State (3) Next State

Fig. 7: Sequence of Events within a period in MMPIP Model [7]

FUTURE WORK

• To segregate demand data in such a way that we can estimate OOQ

for how many products
• To implement/suggest more methodology and compare it with SAA,
TPD & Best Fit approach
• To implement cycle update policy (CUP) whenever there is shortage
occur in that time period
• To implement a learning-based optimization model specifically
Markov decision process model (MDP).
REFERENCES
[1] Levi, Retsef, Georgia Perakis, and Joline Uichanco. "The data-driven
newsvendor problem: new bounds and insights." Operations Research 63.6
(2015): [1294-1306].
[2] Natarajan, Karthik, Melvyn Sim, and Joline Uichanco. "Asymmetry and
ambiguity in newsvendor models." Management Science 64.7 (2017): [3146-
3167].
[3] Taha, Hamdy A. Operations research: an introduction. Pearson Education India,
(2013): [427-481], [531-548], [641-663].
[4] Nahmias, Steven, and Tava Lennon Olsen. Production and operations analysis.
Waveland Press, (2015): [198-313].
REFERENCES

[5] Conover, W. J. "Practical nonparametric Statistics. New York: Wiley." 584 p

(1999): [81-86].
[6] Scarf, Herbert. "A min-max solution of an inventory problem." Studies in the
mathematical theory of inventory and production (1958).
[7] Malladi, Satya Sarvani. Data-Driven Reconfigurable Supply Chain Design and
Inventory Control. Diss. Georgia Institute of Technology, (2018).
[8] Zhang, Huanan. Data-Driven Algorithms for Stochastic Supply Chain
Systems Approximation and Online Learning. Diss. (Industrial and Operations
Engineering) in The University of Michigan (2017).
DYNAMIC SAMPLE AVERAGE APPROXIMATION
METHOD:

•  Data driven SAA ordering quantity

• Data driven SAA cost

=
COMPARISON OF SAA POLICY WITH DYNAMIC
SAA POLICY:
• For Poisson demand distribution : Mean 350 products per day
COMPARISON OF SAA POLICY WITH DYNAMIC
SAA POLICY:
• For Exponential demand distribution : Mean 350 products per day
 CYCLE UPDATE POLICY(CUP) FOR PERISHABLE
PRODUCT WITH LIFETIME M PERIODS [3]
•NOTATIONS
  :
• = On hand inventory level with lifetime i
• + = inventory cost for period t
• = = , 1j m-1
• G(S, ( inventory cost for period 1 <= <=T+1
• = cycle beginning time
 CYCLE UPDATE POLICY (CUP): [3]
•  (INITIALISATION) : set = 1, ∈ (0, , k = 1 = ,t
• Case 1: check t, If it >0,no lost sale in t-1. Hence = go to next period
• Case 2: starting inventory in period t if zero ,set as the beginning of new cycle k+1 and
update base stock (level by

• Where step size is for some , is the k-th

Cycle gradient with respect to
 COMPUTING FOR K-TH CYCLE GRADIENT[3]

•Initialization:
  initialize in period t = and a counting n = 0
Main Step Suppose for some i ∈ {1,……..,m} for each subsequent period t =
• Case 1 : let j = min{ k : denote the lifetime of the oldest inventory in period
t if no outdating occur in period t-1nand set
• Case 2 in the period t-1 if outdating occurs then;
(i) set if i =1 and set n:= n+1
(ii) Else set
Cycle gradient :
Figure 7 :u(t ) is updated for product lifetime 3
 CYCLIC UPDATE POLICY 2 (CUP2):

•  For every sample path w = {,…..,}

}
• The cycle gradient of the holding and lost sales and outdating cost

• Cost for any period

+
 CYCLIC UPDATE POLICY 3 (CUP3):

• } 
• Case 1: at the end of day t see the outdating ( and lost sale demand is realized. If in period t outdating is occur i.e.
earlier

• Case2: at the end of day t see the outdating ( and lost sale demand is realized. If in period t lost sales occur earlier
then outdating i.e

• Case3: at the end of day t see the outdating ( and lost sale demand is realized. If in period t lost sales lost sales and
outdating occur simultaneously i.e.
 COMPARISON OF COST BETWEEN DYNAMIC SAA
POLICY AND CYCLE UPDATE POLICY 1

exponential demand distribution : 300 products per day Demand mean 300 , Range 800
 COMPARISON OF COST BETWEEN CYCLE
UPDATE POLICY 1 AND CYCLE UPDATE POLICY 2
exponential demand distribution : 300 products per day Demand mean 300 , Range 800
 COMPARISON OF COST BETWEEN CYCLE
UPDATE POLICY 1 AND CYCLE UPDATE POLICY 3
exponential demand distribution : 300 products per day Demand mean 300 , Range 800

COMPARISION OF COST FOR CUP (2) WITH CUP (3)

TIME
HEURISTIC TO MANAGE PERISHABLE INVENTORY WITH
POSITIVE LEAD TIME AND TIME VARYING DEMAND
(BASE POLICY WITH LEAD TIME) POLICY (A) [9]

•  Order up-to level dynamic quantity

• If
Then = integer [
 DEMAND WITHDRAWAL POLICIES[9]
• First
  in first out (FIFO) policy for r = 1,………m , 1.on day t the amount of withdrawal
}
• Last in first out (LIFO) policy for r = m, m-1 ,…….1.on day t the amount of withdrawal
}
• Inventory replenishment decisions: for r = 2,….,m

• Inventory cost at the end of period t

+
MIXED POLICY (FIRST IN FIRST OUT AND LAST
IN FIRST OUT POLICY TOGETHER) [10]
• let
  xdemand serve by FIFO and (1-x) serve by LIFO policy.
Demand withdrawal by LIFO policy

}
=-
Demand withdrawal by FIFO policy

}
POLICY (B) CALCULATE ON OF OPTIMAL ORDER QUANTITY
WITH DYNAMIC SAA POLICY[9][1]

•  Dynamic SAA quantity

• Order up-to level policy

POLICY (C) CALCULATION OF OPTIMAL ORDER
QUANTITY WITH CUP POLICY
••  
Order up-to level can be given as

• Data driven order upto level policy can be represented as

POLICY (D) CALCULATION OF OPTIMAL ORDER
QUANTITY WITH IMPLEMENTING CUP POLICY WITH
THE HELP OF DISTRIBUTION FIT AND ESTIMATION
OUTDATING BY SAA POLICY[9]
•  Order up-to level can be given as

• If
Then = integer [
MODEL TO CALCULATE OPTIMAL ORDER QUANTITY CAPTURING
LEAD TIME FOR POISSON DISTRIBUTED DEMAND[8]:

• Optimal
  order quantity according to this model which will capture poisson demand and that can
minimize cost over long time can be given as:

• Here denotes the probability of wasting an item and calculated in following way:

• Here derived order quantity also depends upon expected shortage and which is calculated as
formulated below
• ES = [lam*T(1-
STEPS FOR POISSON POLICY[8]:
••  Guess the initial value of S recommended to start initially with mean of

past demand
• For Poisson demand mean demand = lam*T = lam*L/m set
• Apply this condition until

• For Poisson demand distribution

CALCULATION OF COST SERVICE LEVEL WITH LEAD TIME AND
REVIEW PERIOD

• Parameters
Underage cost, b = pselling - ppurchasing + Cgoodwill
Overage cost , h = ppurchasing + Cdisposal + Cholding – Vsalvage
Cholding = 1, Cdisposal – Vsalvage = 2 , ppurchasing = 8 , pselling = 10 ,Cgoodwill =10
b = 10-8+10 = 12 , h = 8 +2+1 = 11

critical ratio = b/b+h

COMPARISON OF BASE POLICY WITH DYNAMIC
SAA BASE POLICY( POLICY B)
• Poisson distribution demand with mean 300 similarly of 350, 310 , 370 , 400 , 430 , 450 respectively
COMPARISION OF COST BETWEEN BASE POLICY
AND CUP BASE POLICY(POLICY C)
COMPARISION BETWEEN BASE POLICY AND
POLICY(D)
 COMPARISION BETWEEN BASE POLICY AND
POLICY(D)
COMPARISION OF SERVICE LEVEL BETWEEN CUP WITH SAA AND BASE POLICY

FRACTION OF FIFO DEMAND

COMPARISION BETWEEN BASE POLICY AND POLICY(D)
FOR EXPONENTIAL DEMAND DISTRIBUTION
COMPARISION BETWEEN BASE POLICY AND POLICY(D)
FOR EXPONENTIAL DEMAND DISTRIBUTION
COMPARISON OF POLICY (D) AND POISSON
DEMAND DERIVED POLICY
Demand is Poisson distributed with mean of 375 products per day

COMPARION OF CUP SAA AND POISSION DEMAND DERIVED POLICY TOTAL COST
 REFERENCES:
• Levi, Retsef, Georgia Perakis, and Joline Uichanco. "The data-driven newsvendor
problem: new bounds and insights." Operations Research 63.6 (2015): [1294-1306].
• Natarajan, Karthik, Melvyn Sim, and Joline Uichanco. "Asymmetry and ambiguity in
newsvendor models." Management Science 64.7 (2017): [3146-3167].
• Zhang, Huanan. Data-Driven Algorithms for Stochastic Supply Chain Systems
Approximation and Online Learning. Diss. (Industrial and Operations Engineering) in
The University of Michigan (2017).
• Taha, Hamdy A. Operations research: an introduction. Pearson Education India, (2013):
[427-481], [531-548], [641-663].
 REFERENCES:
• Nahmias, Steven, and Tava Lennon Olsen. Production and operations analysis. Waveland Press,
(2015). [52-90], [198-313], [449-453].
• Conover, W. J. "Practical nonparametric Statistics. New York: Wiley." 584 p (1999): [81-86].
• Scarf, Herbert. "A min-max solution of an inventory problem." Studies in the mathematical
theory of inventory and production No. P-910. RAND CORP SANTA MONICA CALIF, (1957).
• Lowalekar, H., Nilakantan, R., & Ravichandran, N. (2016). Analysis of an order-up-to-level
policy for perishables with random issuing. Journal of the Operational Research Society, 67,
483-505.
 REFERENCES:
• Broekmeulen, R.A. and Van Donselaar, K.H., 2009. A heuristic to manage perishable
inventory with batch ordering, positive lead-times, and time-varying demand. Computers &
Operations Research, 36(11), pp.3013-3018.
• Pauls-Worm, K.G.J., 2016. Inventory control for a perishable product with non-stationary
demand (Doctoral dissertation, Wageningen University).