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Periodic and continuous inventory models in the presence of fuzzy costs

Article in International Journal of Industrial Engineering Computations · January 2011

DOI: 10.5267/j.ijiec.2010.03.006 · Source: DOAJ

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 International Journal of Industrial Engineering Computations 2 (2011) 167–178

Contents lists available at GrowingScience

International Journal of Industrial Engineering Computations

homepage: www.GrowingScience.com/ijiec

Periodic and continuous inventory models in the presence of fuzzy costs

Soheil Sadi-Nezhad a*, Shima Memar Nahavandia and Jamshid Nazemia

a
Department of Engineering, Science & Research Branch, Islamic Azad University, Tehran Iran

ARTICLEINFO ABSTRACT

Article history: This paper presents two models, a periodic review model and a continuous review inventory
Received 10 January 2010 model with fuzzy setup cost, holding cost and shortage cost. We use two methods in the name
Received in revised form
22 June 2010 of signed distance and possibilistic mean value to defuzzify. Also we consider the lead time
Accepted 24 June 2010 demand and the lead-time plus one period’s demand as random variables. To validate the
Available online 25 June 2010 models and the solution procedures we apply them to a transformer manufacturing, 'Iran
Keywords:
Fuzzy inventory
transfo', company. Furthermore we design a decision support system which can be used for
Periodic review inventory model efficient evaluation of the proposed models in fuzzy environment.
Continuous review inventory
model
© 2010 Growing Science Ltd. All rights reserved.
Signed distance method

1. Introduction

The increase in global competition especially among the manufacturing sectors motivates many
contemporary organizations to spend more efforts for optimizing their global supply chain. Managing
inventory as a primary function of supply chain, in an efficient and effective way, plays an important
role on reducing the total cost of supply chain. The main purpose of the inventory management
practices in all production companies is to have the required items ready in the predefined schedule
with incurring minimum cost (Cakir & Canbolat, 2008). The proper control of their levels usually
brings significant savings in costs. The development of inventory theory has evolved since the early
1920s, started with basic models with a few parameters to describe the deterministic components
(Kao & Hsu, 2002). However, in the real world applications, estimating the precise value of
parameters like demand and costs may not be possible. What a decision maker faces in this case is a
fuzzy environment. In this regard, the preliminary models are changed to include more details using
probabilistic models and fuzzy models, to overcome this limitation.
Fuzzy set theory introduced by Zadeh (1963), provides an alternate to handle the vague situations. It
has been used in modeling of inventory systems with vague and imprecise parameters since 1980s. In
recent years, various types of inventory problems have been developed in fuzzy environments. Yao
and Lee (1999) introduced a backorder inventory model with fuzzy order quantity as triangular and
trapezoidal fuzzy numbers and shortage cost as a crisp parameter. Yao and Su (2000) developed fuzzy
inventory model without backorder by adopting an interval valued fuzzy number for fuzzifying the
* Corresponding author. Tel:(98)(21)22010690./fax: (98)(21)22043001.
E-mail addresses: [email protected] (S. Sadi-Nezhad),

© 2010 Growing Science Ltd. All rights reserved.

doi: 10.5267/j.ijiec.2010.03.006
168

total demand quantity. Chang et al. (2004) proposed mixture inventory model involving variable lead
time with backorders and lost sales by introducing the fuzziness of lead time demand, the average
demand per year and the backorder rate of the demand during the stock-out period. Yao and Chiang
(2003) considered the total cost of inventory without backorder. They fuzzified the total demand and
cost of storing one unit per day into triangular fuzzy numbers and defuzzified by the centroid and the
signed distance methods. Lin (2008) developed the inventory problem for a periodic review model
with variable lead time and fuzzified the expected demand shortage and backorder rate using signed
distance method to defuzzify. Wu and Yao (2003) fuzzified the order quantity and shortage quantity
into triangular fuzzy numbers in an inventory model with backorder and they obtained the
membership function of the fuzzy cost and its centroid. Handfield et al. (2009) developed a (Q, r)
model based on fuzzy-set including fuzzy parameters like demand, lead time, supplier yield, and
shortage cost. They also introduced a human risk attitude factor to quantify the decision maker’s
attitude toward the risk of stocking out during the replenishment period. The total cost was computed
using centroid as defuzzification method. Tütüncü et al. (2009) used fuzzy set concepts to treat the
uncertainty regarding costs in models of continuous review inventory control with or without
backorder, with fuzzy costs and probabilistic demand then used Park's Median Rule to defuzzify.
Vijayan and Kumaran (2008) introduced stochastic (Q, r) and (R,T) inventory models with a mixture
of backorders and lost sales. They introduced fuzziness in the cost parameters to study the impact and
sensitiveness of the impreciseness of cost components in the decision variables by trapezoidal fuzzy
numbers and adopted the signed distance method to estimate the fuzzy cost function of the models.
Dey and Chakraborty (2009) developed a periodic review model in a mixed imprecise and/or
uncertain environment in which the customer demand, lead-time demand and the lead-time plus one
period’s demand are assumed to be fuzzy random variables. The fuzzy expected cost is defuzzified by
its possibilistic mean value. Table1 shows a summary of literature review.

Table 1
The summery of literature review
Author Year Fuzzy Parameters Defuzzification Method
Centroid, Signed distance
Yao and Chiang 2003 total demand, holding cost
method
Wu and Yao 2003 order quantity, shortage quantity centroid
total demand, lead time demand,
Chang and Yao 2004 Signed distance method
backorder rate
Tutunchu and setup cost, holding cost, shortage cost,
2007 Median rule
Akoz unit cost
Vijayan and setup cost, holding cost, shortage cost,
2008 Signed distance method
Kumaran lost sale cost
expected demand shortage, backorder
Lin 2008 Signed distance method
rate
Dey and total demand, lead-time demand and the
2009 Possibilistic mean value
Chakraborty lead-time plus one period’s demand
Handfield, demand, lead time, supplier yield, and
2009 centroid
Warsing shortage cost
Sadinejad Signed distance method,
2010 setup cost, holding cost, shortage cost
and Memar Possibilistic mean value

Due to some fluctuations in inventory costs, these parameters are described as “approximately equal
to”. Therefore, in this research we characterize these parameters as fuzzy variables in a periodic
model and a continuous inventory model with backorder. Yao & Chiang (2003) introduced the
vantage of signed distance method comparing to centroid method and we prefer to use this method.
 S. Sadi-Nezhad et al./ International Journal of Industrial Engineering Computations 2 (2011) 169

Also for the ease of computation we use Possibilistic mean value as another method for
deffuzification (Day & Chakraborty, 2009).
This article is organized as follows: Section 2 reviews some definitions and properties about fuzzy
sets and defuzzification methods which would be used later. Section 3, deals with the methodology
where the models and their optimal solutions are discussed. The subsection 3.1 explores the inventory
problem for a periodic review and subsections 3.1.1 and 3.1.2 describes the defuzzified model by
signed distance method and possibilistic mean value method. Section 3.2 introduces the continuous
review inventory model in which section 3.2.1 and 3.2.2 are related to its defuzzification through
signed distance and possibilistic mean value methods, respectively. Section 4 shows the results of the
models for and Iranian case study called "Iran Transfo". In section 5, a decision support system with a
user-friendly interface to obtain efficient solution of the proposed models is presented. Finally,
conclusion remarks are given at the end to summarize the contribution of the paper.

2. Fuzzy preliminaries

Fuzzy set theory provides an appropriate framework to treat imprecision of modeling uncertainties
and it offers more flexibility in describing these uncertainties.

Definition 1. A fuzzy set a~ on R = ( −∞,+∞ ) is called a fuzzy point if its membership function is as
follows,

⎧1 x = a
μa~ (x) = ⎨
⎩0 x ≠ a

where a is called its support.

~
Definition 2. The fuzzy set A = (a,b,c) is called the triangular fuzzy number where a < b < c , if the
membership function of A is given by

⎧x − a
⎪b − a a≤ x≤b
⎪
⎪c − x
μ A~ ( x) = ⎨ b≤x≤c
⎪c − b
⎪0 otherwise.
⎪
⎩

~
Definition 3. The α − cut of A = (a,b,c) where 0 ≤ α ≤ 1 is: A(α ) = [ AL (α ), AR (α )] . AR (α ) and
AL (α ) are the left and right end points of A(α ) and are defined as follow,

Aα− = a + α (b − a ) , Aα+ = c − α (c − b) (1)

~ ~
Property1. For the fuzzy triangular numbers A = (a,b,c) and B = ( p, q, r ) we have,

⎧(ka, kb, kc), k > 0

A% ( + ) B% = ( a + p , b + q , c + r ) ⎪
k (.) A% = ⎨(kc, kb, ka), k < 0
A% ( − ) B% = ( a − p , b − q , c − r ) ⎪0,
⎩ k =0
170
~
Definition 4. The defuzzification of A can be found by centroid or signed distance methods. The
~ ~
centroid of A is C ( A~ ) = a + b + c and the signed distance from A to 0 is defined as follows,
3

∫ d ([A )
~ ~ ~ a + 2b + c (2)
(α ), A R (α ) ], 0 d α =
1
d ( A ,0 ) = L
0 4

~~
According to Kumaran (2007), it can be concluded that using d ( A , 0 ) to defuzzify a fuzzy number, is
~
better than using C ( A ) .

2.1 Possibilistic mean value of a fuzzy number

~
For a given fuzzy number A , the interval-valued possibilistic mean is defined as,

M ( A% )) = [ M L ( A% ), M R ( A% )] ,

~ ~ ~
where M L ( A) and M U ( A ) are the lower and the upper values of A and are, respectively, defined by
Day and Chakraborty (2009).

1 1

∫ αAα dα ∫ αAα dα
− +

~ ~
M L ( A) = 0
1
and M R ( A) = 0 1
∫ αdα
0
∫ αdα
0
~
The possibilistic mean value of A is then defined as,

1
~
M ( A) = ∫ α (Aα− + Aα+ )dα (3)
0

3.Methodology

We make use of the following notations through this paper:

T the time between replenishments;

R target inventory level;
Q lot size in units;
r reorder point;
A unit cost of placing an order for an item;
h inventory holding cost per unit per year;
π unit shortage cost;
D annual demand

3.1 periodic review inventory model

A periodic review system involves determining the amount of an item in stock at a specified, fixed
time interval and placing an order that when added to the quantity on hand, will equal to
predetermined maximum level. The target inventory level R, is the sum of expected demand during
the lead time and replenishment period plus the safety stock. Due to fluctuations in demand or
 S. Sadi-Nezhad et al./ International Journal of Industrial Engineering Computations 2 (2011) 171

variable lead time, stock out may occur, in which case a penalty per unit shortage is incurred. The
purpose of the periodic inventory model is to find the optimal time between replenishment and
maximum inventory level such that the combination of the order cost and the holding cost and
shortage cost is minimized. The approximate mean total cost is expressed as follows,

C (R ,T ) =
A ⎡
+ h ⎢ R − DL −
DT ⎤
+
π B ( R , T ), (4)
T ⎣ 2 ⎥⎦ T

where B ( R, T ) is the expected shortage at the end of the cycle and is defined as follows,
∞ (5)
∫
+
B ( R , T ) = E ( D L +T − R ) = ( x − R ) f ( x ) dx ,
R
where x denotes the lead-time plus one period’s demand that follows a normal distribution. f (x ) is
normal probability distribution function with mean μ L+T and standard deviation σ T + L .
To minimize the C(R,T) we solve ∂d (C ( R , T ), 0 ) = 0 which yields,
∂R
∞
hT
∫ f ( x, T )dx = π
R
. (6)

The complementary cumulative distribution of x is as follows,

⎛ hT ⎞ (7)
R = F −1 ⎜1 − ⎟.
⎝ π ⎠

The initial value of T concludes the value of R and consequently the value of C(R,T) can be
calculated. This procedure is iterated until the condition C ( R i − 1 , Ti − 1 ) − C ( R i , Ti ) > 0 is achieved in
stage i, which means the cost needs to be decreased until it attains its minimum which yields T * and
R* to be T * = Ti −1 and R * = R i −1 .
Note that the values of μ L+T and σ L+T must be recalculated in the cumulative distribution function for
each iteration.

3.1.1 Fuzzy periodic review inventory model using signed distance method

Since evaluating actual costs in real world is very difficult, if not impossible, we consider all costs in
the model in fuzzy sense. Consider the fuzzy costs as follows,

π = (π −λ1,π,π + λ2 ),
h = (h −Δ1, h, h + Δ2 ) , (8)
A = ( A−δ1 , A, A+δ 2 ) .

By substituting these fuzzy costs into (4) we get three expected annual costs as follows,

A − δ1 DT π − λ1
C1 ( R, T ) = + (h − Δ 1 )(R − DL − ) + E ( D L +T − R ) + ( ),
T 2 T
A ⎡ DT ⎤ π ,
C 2 (R,T ) = + h ⎢ R − DL − ⎥ + E ( D L +T − R ) +
T ⎣ 2 ⎦ T (9)
A + δ2 DT π + λ2
C3 (R, T ) = + (h + Δ2 )(R − DL − ) + E(DL+T − R)+ ( ).
T 2 T
172

Using the signed distance method given in (2) yields the following defuzzified value of C(R,T),
1 ⎡δ 2 − δ1 λ − λ1 ⎤
+ (Δ 2 − Δ 1 )( R − DL −
DT
d ( C ( R , T ), 0 ) = C 2 + ⎢ )+( 2 ) B ( R , T ) ⎥.
4⎣ T 2 T ⎦

Similar to the crisp case, the optimal values of R and T are obtained by taking the derivative of C(R,T)
with respect to R, which yields,

⎡ Δ4 − Δ3 ⎤
∞ ⎢h + 4 ⎥T
⎣ ⎦ ,
∫ f ( x , T ) dx =
π6 − π5
R π+
4
or

⎛ ⎡ Δ4 − Δ3 ⎤ ⎞
⎜ ⎢h + ⎥T ⎟
⎣ 4 ⎦
R = F −1 ⎜ 1 − ⎟. (10)
⎜ π6 −π5 ⎟
⎜ π + ⎟
⎝ 4 ⎠

The solution procedure proposed for the crisp case in the previous section is implemented here to find
T * and R* .

3.1.2 Fuzzy periodic review inventory model using possibilistic mean value method

The aim of this section is to use the α − cut of the fuzzy inventory costs to derive the α − cut of the
fuzzy total cost. The α − cuts of the setup cost, holding cost and shortage cost are calculated using
(1). Substituting the left endpoints of the costs in (4) results the left endpoint of the total cost and the
right endpoints results the right endpoint of the total cost as follow,

Aα− ⎡ DT ⎤ π α−
Cα− = + hα− ⎢ R − DL − + B ( R , T ) ,
T ⎣ 2 ⎥⎦ T
A+ ⎡ DT ⎤ π α+ (11)
Cα+ = α + hα+ ⎢ R − DL − + B ( R , T ) .
T ⎣ 2 ⎥⎦ T

The possibilistic mean value of the above interval through (3) is determined as follows,

1
(
C ( R, T ) = ∫ Cα− + Cα+ dα . )
0

The procedure to find the optimal values is the same as section 3.1 but R is determined as follows
where u is defined as,

hT
u = 1− , (12)
π

with α = 0, the two lower edges and with α = 1 , the upper edge of the triangle are made as follows,
 S. Sadi-Nezhad et al./ International Journal of Industrial Engineering Computations 2 (2011) 173

u1 = 1 −
h 3T ,
u2 = 1 −
h2T ,
u3 = 1 −
h1 T . (13)
π1 π2 π3

α-cut
u2

u1 u3

The left and the right endpoints of this interval are as follows,

uα− = u1 + α (u 2 − u1 ),
(14)
uα+ = u 3 − α (u 3 − u 2 ).

Therefore, the defuzzified value using its possibilistic mean value given in (3) is calculated as
follows,

∫ (uα + uα )dα ,
− +
u= (15)
0

and R is also calculated as R = F −1 (u) .

3.2 Continuous review inventory system

In a continuous review inventory system, an order for a lot is placed whenever the quantity on hand is
dropped to a predetermined level, known as the order point. The total cost expression of this model
used in this paper is presented as follows,

AD ⎡Q ⎤ ⎛ πD ⎞ (16)
C (Q , r ) = + h⎢ + r − μ ⎥ + ⎜⎜ B ( r ) ⎟⎟ ,
Q ⎣2 ⎦ ⎝ Q ⎠

where B(r ) is the expected demand shortage at the end of the cycle and is defined as follows,

∞
B (r ) = E (D L − r ) + = ∫ ( x − r ) f ( x ) dx ,
R
(17)

where x is regarded as the value of lead-time demand with normal probability distribution function
f (x ) , mean μ L and standard deviation σ L . Taking the first derivative of C(Q,r) with respect to Q
and r yields the optimal values as follows,

2 D[ A + πB(r )] (18)
Q* = ,
h
174

⎛ hQ ⎞ (19)
r * = F −1 ⎜1 − ⎟.
⎝ πD ⎠

3.2.1 Fuzzy continuous review inventory model using signed distance method

By substituting fuzzy parameters in (16) and getting three total costs like the periodic model, the
defuzzified cost using signed distance method is determined as follows,

1 ⎡ (δ − δ1)D ⎡Q ⎤ ⎛ (λ 2 − λ1 ) D ⎞⎤
d ( C ( Q , r ), 0 ) = C ( Q , r ) + ⎢
2
+ (Δ 2 − Δ 1 )⎢ + r − μ ⎥ + ⎜⎜ B ( r ) ⎟⎟ ⎥ .
4 ⎣ Q ⎣2 ⎦ ⎝ Q ⎠⎦

Taking the partial derivatives with respect to Q and r yields,

(δ 2 − δ 1 ) (λ 2 − λ1 )
2 D[ A + + (π + ) B ( r )]
Q *
= 4 4 , (20)
(Δ 2 − Δ 1 )
h+
4

and
⎛ (Δ 2 − Δ1 ) ⎞
⎜ (h + )Q ⎟
r =F
* −1 ⎜1 − 4 ⎟. (21)
⎜ (λ − λ1 ) ⎟
⎜ (π + 2 )D ⎟
⎝ 4 ⎠

Since the optimum values of Q and r cannot be directly obtained by Eq. (20) and Eq. (21), the
iterative procedure suggested by Hadley and Whitin (1963) is used to solve the equations. The initial
value for Q is obtained by equating B(r) to zero and with the r resulted from substituting Q in (21)
and B(r) is obtained by substituting r in (17) and the new Q is obtained by Eq. (20). Repeating this
procedure until the condition Qi = Qi −1 is met, will lead us to find the optimal values of Q and r.

3.2.2 Fuzzy continuous review inventory model using possibilistic mean value method

Similar to section 3.1.2, the α − cut approach is used to treat the fuzziness and derive the total annual
cost as follows,

Aα− D ⎤ ⎛π D ⎞
−
⎡Q
Cα− (Q, r ) = + hα− ⎢ + r − μ ⎥ + ⎜⎜ α B(r ) ⎟⎟
Q ⎣2 ⎦ ⎝ Q ⎠
Aα+ D ⎤ ⎛π D ⎞
+
⎡Q (22)
Cα+ (Q, r ) = + hα+ ⎢ + r − μ ⎥ + ⎜⎜ α B(r ) ⎟⎟
Q ⎣2 ⎦ ⎝ Q ⎠
1
(
C (Q, r ) = ∫ Cα− + Cα+ dα . )
0

The minimum, the mean and the maximum values of the Q represented by Q1 , Q2 and Q3 ,
respectively, are calculated as follows,

2 D [ A 1 + π 1 B ( r )] 2 D [ A 2 + π 2 B ( r )] 2 D [ A 3 + π 3 B ( r )]
Q1 = Q2 = Q3 =
h3 h2 h1
 S. Sadi-Nezhad et al./ International Journal of Industrial Engineering Computations 2 (2011) 175

The possibilistic mean using (3) is then presented as follows,

∫ (Q α )
Q = −
+ Q α+ d α . (23)
0

Repeating the same concept applied in section 3.1.2 we have,

u1 = 1 −
h3Q
π1D
hQ hQ
, u 2 = 1 − 2 , u 3 = 1 − 1 , u = ∫ uα− + uα+ dα , r = F −1 (u) .
π 2D π 3D
( ) (24)
0

The iterative process in section 3.2.1 is applied here to find optimal Q and r. Fig.1. gives an overview
of the inputs and outputs of the models.

Inputs Model outputs

Total demand -Time

replenishment
Periodic review model
-Maximum
Setup cost
inventory

‐ Safety stock
Holding cost
--Shortage quantity

Shortage cost

Continuous review model - Order quantity

-Order point
Lead time

Fig.1. Inputs and outputs of the models

4. Application in Iran Transfo

In the previous sections, we have shown how to modify the crisp models for continuous and periodic
review inventory systems in order to consider the fuzziness associated with the costs. Recently, there
has been an increase interest on using fuzzy theory for real-world applications (Modarres et al.
(2010). In order to validate and illustrate the results of the proposed models we have conducted an
application in a private company called "Iran Transfo". We have also selected the most strategic items
which constitute group products A and B in ABC inventory classification. The total demand, the lead
time and the fuzzy costs, as inputs, are shown in Table 2. Deficiency of any of these items leads to an
interruption on manufacturing which causes approximately 35,000,000 US dollar. The results for both
models, with both defuzzification methods are determined in Table 3.
176

Table 2
Input parameters
Total Lead time
name Fuzzy setup cost Fuzzy holding cost
demand (month)
1 4.488 4 (95000, 100,000, 103,000) (1000, 1500, 1800)
2 3240 1 (9700 10000, 10200) (115,120,122)
3 960 5 (118,000, 120,000, 121,000) (580,600,620)
4 10800 6 (67,000, 70,000, 72,000) (285,300,310)
5 10320 6 (56,000, 60,000, 62,000) (200,225,250)

Table 3
The optimal solutions
Periodic model results Continuous model results
Fuzzy method C(R,T) R T C(Q,r) Q r
1 SDM 2,556,900 3078 54 2,288,800 784 2229
α-cut 2,578,500 3077 54 2,308,100 790 2228
2 SDM 159,720 1503 72 125,660 736 576
α-cut 159,990 1504 72 125,870 735 577
3 SDM 3,049,900 9621 54 2,634,900 1934 7622
α-cut 2,975,400 1023 54 2,621,700 1832 7629
4 SDM 1,544,900 9867 72 1,399,100 2300 7336
α-cut 1,547,200 9867 72 1,370,900 2195 7341
5 SDM 262,680 1266 216 230,280 644 577
α-cut 272,630 1265 216 238,940 634 576

5. Decision support system

In today’s timeliness production environment, it is extremely important for the decision makers to
have access to the decision support tools in order to make rapid and accurate decisions. In this section
a decision support system is developed to efficiently use the models and corresponding iterative
procedures and to analyze the effectiveness of the proposed approaches when tackling real world
problem instances. The technological background of the system is illustrated in Fig. 2.

Ms MATLA
Excel file
Access B m-file

Vb.net application User

Fig. 2. The structure of DSS

 S. Sadi-Nezhad et al./ International Journal of Industrial Engineering Computations 2 (2011) 177

The proposed DSS model consists of three major components where the first one is a database
component in which all inventory records are stored and can be modified for updates. The database is
implemented with Microsoft access. The second component is a model based component which
includes both continuous and periodic review models with user-defined parameters. The models and
the procedures are written in MATLAB software. The third item is the user interface which is
designed in Visual Basic. Transforming data between MATLAB and Visual Basic is performed by
using an excel file as an intermediate to pass data between these two environments. The main
interface window of DSS is given in Fig. 3. As we can observe, user can see the results for both
models and choose the proper one according to their condition. Also user can choose the time period
and see the optimal result foe from the selected period. The point is that both models perform the
calculation using both defuzzification methods and the results for the method which yields the
minimum cost are shown in the form.

Fig. 3. The main form of the DSS

6. Conclusion

Incorporating fuzzy set theory and probability theory into inventory models potentiates the model to
tackle real world fuzziness and randomness. In this article, we have applied the fuzzy set theory to
reformulate the two periodic and continuous inventory models where shortages are backordered with
shortage cost are incurred. Also, we have used the probabilistic theory to express the demand in the
replenishment time. In both models, we have used the triangular fuzzy numbers to represent the
imprecise setup cost, holding cost and shortage cost and obtained the model with fuzzy total cost. The
178

periodic model gives the optimal values of review periods and maximum inventory levels and the
continuous review model gives the optimal order quantity and order point. For these fuzzy models,
we have employed two methods of defuzzification which are the signed distance and the possibilistic
mean value. The implementation of the proposed method has also been illustrated using some
numerical example. In addition, we have also proposed a decision support system with a user friendly
interface, for efficient and effective use of the proposed models. Hence, the suggested inventory
models are observed to be executable and useful for the decision maker in the real world.

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