Coordinate Replenishment for

Multiple items
Lect Delivered by
S P Sarmah
 Multiple item ordering problem :
Coordinated replenishment at a single stocking
point (n item) :
 Coordinated the control of different stock keeping
units.
 The item are all stocked at the same location and they
share a common supplier or mode of transportation.
 Alternatively they share a common production facility.
 Conceptually, the item to be coordinated could be the
same item at different parallel location.
 Contd…

 In coordinated replenishment of n items, there is a

major fixed (set up) cost associated with a
replenishment of a family of coordinated items and a
minor fixed (set up) cost for each item involved in the
particular replenishment.
 Coordinate the replenishment of a group of items.
(for purchasing decision)
 Coordinate the production of a group of items. (for
production decision)
i.e. refilling the items from outside supplier.
 Advantage & disadvantage of Coordination

There are number of reasons for coordinating items

when making replenishment decision. These include:
 Savings on unit purchase cost.
 Savings on unit transportation cost.
 Savings on unit ordering/setup cost.
 Ease of scheduling.

Disadvantage
 A possible increase in average inventory level.
 An increase in system control cost.
 Reduced flexibility.
Deterministic case
Assumption:
 The demand rate of each item is constant and deterministic.
 The refilling quantity of an item need not be an integral
number of units.
 No discount in either the unit purchase cost or the unit
transportation cost.
 Replenishment lead time is zero.
 No shortage are allowed.
 The entire order quantity is delivered at the same time.
When order placement time of item is integer
multiple of common order interval time

Ti  m iT where T is
Item 1 order once every T period.
the basic ordering cycle
Item 2 order once every 2T period.
Item 3 order once every 3T period.
 Contd…
T is the basic ordering period.
A = major setup cost for the family of items in dollar.
ai = minor setup cost for item i in Rs.
Di = demand rate of item i in unit/unit time.
Vi = unit cost of the item i Rs/unit.
n = number of items in the family ( items are numbered as 1,2,3,
….,n-1, n)
mi = integer number of T intervals that the replenishment quantity
of item i will last.
 Contd…

A
Major ordering cost per year 
T
n
ai

i 1 mi
Minor ordering cost per year 
T
n
ai
A
i 1 mi
Total ordering cost
T

n
miTDVi ir
Inventory carrying cost 
i 1 2
 Contd…
n
ai
A
Total cost= TRC mi T
 i 1
  mi DV
i ir
T 2

 n
ai 
2 A   
dTRC  i 1 mi ,
  0  T  (mi ' s ) 
dT r  mi DV i i

Once the best value of mi‘s are known as, the corresponding
value of T is given by

 n
ai 
2 A   
 i 1 mi 
T  (mi ' s )  ..............(1)
r  mi DV i i
 Contd…
Substituting the value of T* in total relevant cost equation one
gets,
ai  a 
A 2 A   i  r
TRC 
mi
  mi  .  mi DiVi ,
 a  r  mi DiVi 2
2 A   i 
 mi 
r  mi DiVi

After simplification, one gets

 a 
TRC  mi ' s   2  A   i

 r  mi DV
i i
 mi 
 Contd…
We wish to select mi‘s to minimize TRC.
minimize TRC  minimize TRC   z
2

 ai 
Thus, z   A      mi DV
i i
 mi 

(r is constant therefore it is ignored. Similarly constant 2 is also

ignored)

The minimization of the equation is no simple matter because of

two facts:
1) The mi‘s interact (i.e. the effect of m i the value depend on the
value of the other mi‘s .
2) mi‘s must be integer.
Developed a heuristic method for solving the
problem:
Assuming z to be differentiable, i.e. ignoring integer
restriction & partial differentiation, we get
zmi ' s  ai   aj 
  A    D jV j   mi DV i i   2
m j mi   m 
  j 
a j  mi DV
i i
m  2
j .......(1), j  1, 2,....n items
 ai 
D jV j  A   
 mi 

Another item k
for j  k ak  mi DV
i i
m 
2
k
 ai 
DkVk  A   
 mi 
 Contd…
Dividing  aj 
 
2
mj  D jV j 

2
mk  ak 
 
 DkVk 
If  aj   ak 
    
 D jV j D
  k kV

m j  mk
 ai 
Therefore the item i having smaller value of  
should have the
DV
 i i
lowest value of m namely 1.
i

 ai 
Arrange all item in increasing order of  DV 
 i i
 Contd…
The item in the top of the list will have minimum m i = 1 and
call this as item 1. & rename the items accordingly.
ai minor cost
 
DVi i total consumption in Rs.
is minimum, we can order the item every time.
If it is higher order should be less frequent.
Since,
a j  mi DV
i i
m 
2
j
 ai 
D jV j  A   
 m i 

 mj 
aj  m DV i i i
...........( B) j  2, 3,...., n
D jV j  a 
 A  m i

 i 

(we have to find the value of m )

 Contd…
Suppose there is a solution to these equation that results in
 m DV  C....................................(C )
i i i

 a 
 A 
i

 m i 
 ai 
[we have to determine the value of  mi DV
i i  A 
and
]  mi 

Then from equation (B) a

j
mj  C for j  2,3,...., n
D jV j
n n
Therefore ai

i 1
i i  m1 D1V1  C .
mi DV
i 2 DV
.DV
i i
i i
 Contd…
As m1  1
n
 D1V1  C  ai DV
i i
i 2

Similarly,
n
ai 1 n

i 1 m
 a1   ai DV
C i 2
i i
i

Substituting the value in equation (C), we get

n
D1V1  C  ai DiVi
i 2
n
 C2
1
A  a1 
C
i 2
ai DiVi
 Contd…
n n
 D1V1  C  ai DV
i i  c
2
 A  a1   C  ai DV
i i
i 2 i 2

D1V1
C 
A  a1

Substituting this value in equation (B), we get

aj D1V1
mj  .
D jV j A  a1
aj D1V1
 . for j  2, 3,...., n
D jV j A  a1
Steps:
 ai 
1. Arrange the items in increasing order of  
DV
 i i

2. Renumber the item with item in the top of the list as item 1.
Set m1=1.

ai  D1V1 
3. Evaluate mi    for i  2, 3,..., n
DVi i  A  a1

4. Round off mi with minimum mi = 1.

5. Evaluate T* using the mi‘s of step (4).

6. Determine QiVi = miDiViT* for i = 1,2,..n

or Qi = miDiT*
 Contd…
 The results are not always optimal because mi values are rounded.
And

 ai 
TRC  2 A    r  mi DV
i i
 mi 
Example:
A company orders four different items A, B, C and D from a
supplier
Major ordering cost = Rs. 40, Minor ordering cost = Rs. 15
Minor ordering cost incurred due to addition of another item
Inventory carrying rate r = .24 Rs./Rs./year
The details of item are given in Table
Find the total appropriate value of family cycle time and the
value of integer mi when the items should be ordered?
Find total cost and calculate the cost penalty?
 Contd…
item Annual value Minor setup cost
DiVi ai

A 12500 15
B 1400 15
C 86000 15
D 3000 15

Now
a1 15
Item 1   1.2  103
D1V1 12500
a2 15
Item 2   1.07  102  10.7  103
D2V2 1400
 Contd…
a3 15
Item 3   1.74  104  .17  103  minimum
D3V3 86000
a4 15
Item 4   5  103
D4V4 3000

New arrangement
a3
Item 1. Item C  .17  103
D3V3
a1
Item 2. Item A  1.2  103
D1V1
a4
Item 3. Item D  5  103
D4V4
a2
Item 4. Item B  10.7  103
D2V2
 Contd…
For lowest value item C, renamed as Item 1 assigned m1 = 1
Now for the Item A, renamed as item2,
a2 D1V1
m2  .
D2V2 A  a1
38600
 1.2  10   1.37
40  15
So m2  1

Similarly for Item D, renamed as item 3

3 8600
m3  5 10  2.796  3
55
For Item B, renamed as item 4
8600
3
m4  10.7  10   4.09  4
55
ANY QUESTIONS?
Group discounts
 Single possible discount based on total replenishment size is
considered here.
 Here a reasonable compromised solution is given for a single
possible discount based on total replenishment size.
 We have already calculated

 n
ai 
2 A   
 i 1 m i 
T  (mi ) 
r  mi DV i i

And, ai  D1V1 
mi   
DVi i  A  a1 
 Contd…
Step 1. Compute the mi ' s and T assuming that
Vi  V0i (1  d )
Where V0i = basic unit cost of the item i without discount.
d = fractional discount when the total replenishment
equals or exceed the break point quantity Q6

Step 2. Scale up the family cycle time T found in step 1 until the
smallest replenishment size equals the quantity break
point.
This is achieved by
Tb = Qb / Summation of Di ‘s of all items having mi = 1

mi ' s
The found in step 1 are maintained.
 Contd…
The cost of this break point solution is found by using the
following total relevant cost expansion
ai
A
 n
 mi r 1  d  n
TRC Tb , mi   1  d  DV i 0i    Tb  mi DV
i 0i
 i 1  Tb 2 i 1

Step 3. Determine mi ' s, T & Qi without a discount.

the total cost of this solution is given by
n
 ai  n
TRC best T , mi    DV i 0i  2  A    r  mi DV
i 0i
i 1  m i  i 1

Step 4. compare the TRC values found in step 2 & step 3 and use
mi ' s, T & Qi ' s associated with lower of these.
Example: Three parts are used in the assembly of a product.
These three parts are purchased from the same domestic supplier
that offers a discount of 5% if the value of the total replenishment
quantity is at least Rs. 600, major set up cost = Rs.1.00,
minor set up cost = Rs. 0.50, value of r = 0.24 Rs./Rs./year

Thus major ordering cost = 1.50 – 0.50 = Rs. 1.00

[we subtract it because we have to incorporate all three items in
minor setup cost]
item Di V0i DiV0i

1 12000 0.50 6000

2 8000 0.30 2400
3 700 0.10 70
 Contd…
ai  D1V1 
mi   
DVi i  A  a1 

.5  12000  .5 
Item 1 m1     .58  1
12000  .5  1  .5 

.5  6000  .5 
Item 2 m2     .91  1
8000  .3  1.5 

.5  6000  .5 
Item 3 m1     5.34  5
700  .1  1.5 
 Contd…
.  ai 
 A 
m
T  2 n
i 

r  mi DiV0i
i 1

 .5 .5 .5 
2 1    
  1 1 5   4.2  .045 year
.24 6000  2400  350  2100

Now
Q1  550, & Q1V01  .04512000.5  270
Q1V01  270
Q 2 V02  110
Q3 V03  16
 Contd…
Now in front order interval we have to order item 1 & 2 together
which is equal to 380
Now 380 < 600
It is below the price break point of Rs. 600
Therefore we have to increase the family cycle time T until the
smallest replenishment size equals the quantity break point
(here it is expressed in Rs.)
Qb
Tb 
summation of Di ' s of all item having mi  1
Qb (in Rs. value)

D1V01  D2V02
Rs. 600
  0.07143 year
6000  2400
 Contd…
Since Qb is given in terms of Rs. value, therefore denominator
should also be converted into consumption value.
Cost at price break point:
TRC1 = purchase cost + order cost + holding cost
1  .5  .5  .5 .24  .95
 8470  .95   .07143 6000  2400  350 
.07143 2
 8047  29  71
 8147 Rs./ year
 Contd…
Total relevant cost for best T and mi’s :

 ai  n
TRC2  8470  1  2  A    r  mi DV
i 0i
 mi  i 1
 .5 
 8470  2 1  .5  .5    .24  8470 
 5
 8564
Now this is > 8147
Thus price break quantity gives minimum cost.
Therefore T = .07143 year
m1  1 Q1  TD1  .07143  858.......429
m2  1 Q 2  TD2  .07143  8000  572.......171
m3  5 Q3  TD3  .07143  700  50..........25
A bound on the cost penalty of the heuristic
solution:
A heuristic solution is not guaranteed to give a solution with a
low cost penalty.
But this problem finds a simple lower bound for the cost of the
best (T, nj’s) policy.
n
TRCbond  2  A  a1  D1V1r   2a j D jV j r
j 2

An optional plicy must have item 1 included in every

replenishment of the family.

• The first term is the total relevant cost per unit time of an EOQ
strategy for item 1 considered alone, if we associate the full
cost (A+a1) with each replenishment of item1.
 Contd…
• The second term represents a summation of the total relevant
costs per unit time of an EOQ strategy for each of the other
items, where a costs of only aj is associated with a
replenishment of item j  j  1

 
The cost of any T , n jsolution
's is given by
n aj
A
nj n D j m jTV j r
TRC T , n j ' s   
j 1

T j 1 2
THANKS