Apiems2004 34.7 PDF

Proceedings of the Fifth Asia Pacific Industrial Engineering and Management Systems Conference 2004
COLLABORATION INVENTORY SYSTEM WITH LIMITED RESOURCES AND

WEIBULL DISTRIBUTION DETERIORATION
Hui-Ming Wee*, J onas Yu
**
and Sh-Tyan Law*
*Department of Industrial Engineering
Chung Yuan Christian University
Chung-Li , 32023 Taiwan, R.O.C.
**
Information Management Department Takming College, Taipei, Taiwan 114
[email protected]
ABSTRACT
In the current competitive market environment, integration especially in term of developing
strategies is vital to reduce the overall cost of the enterprise. This is because decision made
independently by one player will not result in global optimum. Global optimality will only be
realized if the perspectives of all players are considered. The study also considers the case
with limited resources. Whenever the storage capacity of the company warehouse is
insufficient, excess stock is held in a rented warehouse (which is more expensive). The
objective of this study is to develop an optimal joint cost from the perspectives of both the
manufacturer and the retailer. The integrated two-stage inventory model with Weibull
distribution deteriorating items is assumed to have a constant demand rate and a limited
retailer storage space. A computer code is developed to derive the optimal solution. A
numerical example is given to validate the results of the inventory model.

Key Words: Inventory Theory and Applications, Weibull Distribution, Deteriorating Items,
Two-stage Inventory, Limited Storage Capacity, J oint Cost.

1. INTRODUCTION
The problem of deteriorating inventory has received considerable attention in recent years.
Deterioration is defined as decay, damage, spoilage, evaporation, obsolescence, pilferage, and
loss of utility or loss of marginal value of a commodity that results in decreasing usefulness
from the original one. Most products such as medicine; blood, fish, alcohol, gasoline,
vegetables and radioactive chemicals have finite shelf life, and start to deteriorate once they
are produced. Ongoing deteriorating inventory has been studies by several authors in recent
decades. Ghare and Schrader (1963) were among the first authors who studied inventory
34.7.1

problems considering deteriorating of items. Convert and Philip (1973) assumed a
two-parameter Weibull distribution deterioration to consider varying deterioration rate of
deterioration. Specially, the Weibull distribution is used to represent the distribution of the
time to deterioration. The rate of deterioration increased with age, or the longer the items
remained unused, the higher the rate at which they failed. Wee (1997) developed a
replenishment policy for items with a price-dependent demand and a varying rate of
deterioration. Wee and Law (1999) applied the discounted cash-flow approach to a
deterministic inventory model of an item that deteriorates over time at varying rate and with a
price-dependent demand. Wee and Law (2001) extended the previous model by Wee and Law
to consider a replenishment and pricing policy. Wang (2002) studied the inventory problem
for deteriorating items with time-varying demands and shortages over a finite planning
horizon. He assumed backlogging rate to be time-dependent. Skouri and Papachristos (2003)
proposed an algorithm to find the optimal stopping and restarting production times for an
EOQ model with deteriorating items and time-dependent partial backlogging. Papachristos
and Skouri (2003) considered a model where the demand rate is a decreasing function of the
selling price and the backlogging rate is a time-dependent function. Abad (2003) considered
the pricing and lot-sizing problem for perishable good under finite production, exponential
decay and partial backordering and lost sale. Goyal and Giri (2003) consider the
production-inventory problem when the demand, production and deterioration rate are
assumed to vary with time. Shortages are allowed to be backlogged partially.
The cooperation between manufacturers and retailers for improving the performance of
inventory control has received a great deal of attention from researchers. Several authors have
studied the integrated inventory models in which the manufacturers and the retailers
coordinate their production and ordering policies, in order to lower the joint inventory costs.
Historically, the inventory model is derived independently by different functions in the supply
chain, such as procurement, production and distribution. With recent advances in
communications and information technology, the integration of those functions is a common
phenomenon. However, due to limited resources, shortened life cycle, increasing competition
and market globalization, enterprises are forced to develop supply chain that can respond
quickly to customer needs with minimum stock and maximum service level. Goyal (1976)
were among the first authors who studied manufacturer-retailer inventory in the integrated
supply chain. Since then, a number of studies on manufacturer-retailer inventory models have
been done. Hill (1997) incorporated the effect of finite replenishment rate and multiple
deliveries per order. Wee and J ong (1998) assumed an exponential distribution deterioration to
consider constant deterioration rate of deterioration. Wee (1998) incorporated the effect of
deterioration and quantity discount to derive the optimal pricing policy. Goyal and Nebebe
(2000) considered a problem of determining economic production and shipment policy of a
product supplied by a vendor to a single buyer. Woo, Hsu and Wu (2001) considered an
integrated inventory system where a single vendor purchases and processes raw materials in
34.7.2

order to deliver finished items to multiple buyers. The vendor and all buyers are willing to
invest in reducing the ordering cost in order to decrease their joint total cost. Yang and Wee
(2002) developed a single-vendor and multiple-buyers production-inventory policy for a
deteriorating item with a constant production and demand rate. A mathematical model shown
that the integrated policy results in an impressive cost reduction when it is compared with the
independent decisions made by the vendor and the buyers. Rau, Wu and Wee (2003)
developed a multi-echelon inventory model for a deteriorating item and derive an optimal
joint total cost from an integrated perspective among the supplier, the producer, and the buyer.
Yang and Wee (2003) developed an integrated inventory model for single-vendor and
single-buyer with constant deterioration rate of deterioration and multiple deliveries per order.
Although there are many integrated deteriorating inventory models, but most of the
previous works did not take into account the two-parameter Weibull distribution deterioration
and limited storage capacity. This is not true in real life since the above factors are significant.
For this reason, our study develops an integrated two-stage inventory model with Weibull
distribution deteriorating items by assuming a constant demand rate and a limited retailer
storage space. A numerical example is given in the study to demonstrate the theory.
2. ASSUMPTIONS AND NOTATION
The mathematical model developed in this paper is based on the following assumptions and
notation :
Assumptions
1. Demand rate is known and constant.
2. The production rate is finite and constant, larger than the demand rate and is unaffected by
the lot size.
3. Shortages are not allowed.
4. Deterioration of the item follows a two-parameter Weibull distribution.
5. Deterioration occurs as soon as items are received into inventory.
6. There is no replacement or repair of deteriorating items during the period under consideration.
7. Carrying cost applies to good units only.
8. Single producer and single distributor are considered.
9. There are multiple deliveries per order.
10. There is only one production cycle per order.

Notation
Production rate (units/unit time), pd p
Consumers demand rate (units/unit time) d
34.7.3

( )
1 1
t I Inventory level changes with time during production period,
1
t
1 1
T t 0
( )
2 2
t I Inventory level changes with time during non-production period,
2
t
2 2
T t 0
1
T Production period in each cycle
2
T Non-production period in each cycle
Scale parameter, 0 >
Shape parameter, 0 >
1
t

Deterioration rate
n Number of delivery per order
( ) t I
m
Manufacturers inventory level at any time t
( ) t I
r
Retailers inventory level at any time t
r 1
C Retailers ordering cost per order cycle ($/order)
m 1
C Manufacturers setup cost per production cycle ($/cycle)
r 2
C Retailers per unit holding cost per unit time ($/unit/unit time)
m 2
C Manufacturers per unit holding cost per unit time ($/unit/unit time)
r
C Retailers per unit deterioration cost ($/unit)
m
C Manufacturers per unit deterioration cost ($/unit)
r 0
K Retailers incoming quality control cost per delivery ($/delivery)
m 0
K Manufacturers transportation charge per delivery ($/delivery)
r
TC Retailers total cost per unit time ($/unit time)
m
TC Manufacturers total cost per unit time ($/unit time)
TC Integrated total cost function including
r
TC and per unit time ($/unit
time)
m
TC
m
I Manufacturers maximum inventory level
r
I Retailers maximum inventory level
W retailers maximum limited storage space
f retailers storage requirement for each unit

A brief introduction to the rate of deterioration is given. Given the nation as follows:
t Time to deterioration, 0 t >
( ) t f Probability density function of product life (p.d.f.)
( ) t F Cumulative distribution function of product life (c.d.f.)
( ) t R Reliability
( ) t Z Instantaneous rate of deterioration

From reliability theory, one has ( ) ( ) t F 1 t R = , ( )
( )
( ) t R
t f
t Z = and . The product
life is assumed to follow a two-parameter Weibull distribution. We assume is scale
( ) 1 0 R =
t x
34.7.4

parameter, is shape parameter and . One has y 0 y , x >
( )
y
xt 1 y
e xyt t f

=
( ) ( )
y
xt
t
e 1 dt t f t F

= =

Using the former definition, one has
( ) ( )
y
xt
e t F 1 t R

= =
( )
( )
( )
1 y
xt
xt 1 y
xyt
e
e xyt
t R
t f
t Z
y
y

= = =

( )
1 y
xyt t Z

= will be used in the model development in this paper.
When , deteriorating rate increases with time; 1 y >
When , deteriorating rate decreases with time; and 1 y <
When , deteriorating rate is constant; the two-parameter Weibull distribution reduces to
the exponential distribution
1 y =
3. MODEL DEVELOPMENT
The manufacturers inventory system in Fig. 1 can be divided into two independent phases
depicted by to . This methodology reduces the complexity in our problem derivation
and analysis. Each phase has its own time unit, , which starts from the beginning of the
phase, . During time period, there is an inventory buildup and so there is deterioration
becomes effective. It increases to its maximum, , at
1
T
2
T
i
t
i
T
1
T
m
I
1 1
T t = . There is no production
during time period and the inventory level decreases due to demand and deterioration.
The inventory level becomes zero at
2
T
2 2
T t = .

[See APPENDIX Figure 1]

The manufacturers inventory system can be represented by the following differential
equations:
( )
( ) (
1 1
1
1
1
1 1
t I t d p
dt
t dI

=

)
1 1
T t 0 (1)

( )
( )
2 2
1
2
2
2 2
t I t d
dt
t dI

=

2 2
T t 0 (2)
34.7.5

The first-order differential equations can be solved by using the boundary conditions
. From Spiegel1960, one has ( ) 0 0 I =
1 2 2
( ) 0 T I =

( )
( )
1
1
t
t
0
u
1 1
e
du e d p
t I

= ,
1 1
T t 0 (3)

( )

2
2
t
t
0
u
mv
2 2
e
du e d I
t I

= ,
2 2
T t 0 (4)

For small value, the approximate solution is derived by neglecting the second and
higher term of . From Fig. 1,
( ) 0 T I
2 2
= ; hence from equation (4),

du e d I
2
T
0
u
m

=

du
! m
u
d
2
T
0
0 m
m m
=
=

( )
=
+
+
=
0 m
1 m
2
m
1 m ! m
T
d
+
+
+
1
T
T d
1
2
2

(5)

From Fig. 1, ( ) ( )
m 2 1 1
I 0 I T I = = , one has
( )
2
T
0
u
1
T
1
T
0
u
du de
e
du e d p

Expand the exponential and the second or higher-order terms in are neglected, the
approximate solution is

( )

+
+ =
+

+ +
1
T
T d
1
T
T d p
1
2
2
1
1
1

(6)

The method used in Misra (1975), when 1 << where ( ) 1 T
1
1
+
+

is neglected,
results in the following approximate value for
1
T
34.7.6

+
+
+
1
T
T
d p
d
T
1
2
2 1

(7)

From the fact , one has
2 1
T T T + =

+
+
1
T d
p
d p
T
T
2 2

(8)

The change in the retailers inventory level against time is depicted in Fig. 2.

[See APPENDIX Figure 2]

The retailers inventory system can be represented by the following differential equation:

( )
( ) t I t d
dt
t dI
r
1 r
=

,
n
T
t 0 (9)

Using the boundary condition, ( )
r r
I 0 I = , the first-order differential equation can solved..
From Spiegel (1960), one has

( )

t
t
0
u
r
r
e
du e d I
t I

= ,
n
T
t 0 (10)

For very small value, the approximate solution is derived by neglecting the second and
higher term of . From Fig. 2, 0
n
T
I
r
=
; hence from equation (10),

du e d I n
T
0
u
r

=

du
! m
u
d
n
T
0
0 m
m m
=
=

( )
=
+
+
=
0 m
1 m
m
1 m ! m
n
T
d

34.7.7

+
+
1
n
T
n
T
d
1

(11)

For very small value, the approximate solution is derived by neglecting the second and
higher term of . The retailers total cost function per unit time,
r
TC , is the sum of the
ordering cost, the incoming quality cost, the holding cost and deteriorating. One has
r
TC
( ) ( ) ( )

+ + + =

d
n
T
0 I
T
n
C dt t I
T
n
C nK C
T
1
r r
n
T
0
r r 2 r 0 r 1

( )

+ + =

d
n
T
du e d
T
n
C dt
e
du e d du e d
T
n
C nK C
T
1
n
T
0
u
r
n
T
0
t
t
0
u
n
T
0
u
r 2 r 0 r 1

( )
( )
( )
+ + =
=
+
+
d
n
T
du e d
T
n
C
dt
! m
t
1 m ! m
t
n
T
d
T
n
C nK C
T
1
n
T
0
u
r
n
T
0
0 m
m
0 m
1 m
1 m
m
r 2 r 0 r 1

( )
( )( )
+ +
+ +
+ +
1
n
T
d
T
n
C
2 1
n
T
2
n
T
d
T
n
C nK C
T
1
1
r
2 2
r 2 r 0 r 1

(12)
The manufacturers total cost function per unit time, , is the sum of the setup cost,
the incoming quality cost, the holding cost and deteriorating. One has
m
TC
m
TC
( ) ( ) ( ) ( )
( )
+ + + =

d
n
T
0 I n dT pT
T
C
dt t I n dt t I dt t I
T
C
nK C
T
1
r 1
m
n
T
0
r 2
T
0
2 2 1
T
0
1 1
m 2
m 0 m 1
2 1

34.7.8

( ) ( )
( )
( )
( )
( )
( )
( )
( )
+
+ + =
=
+
+
=
+ +
=
+
d
n
T
du e d n dT pT
T
C
dt
! m
t
1 m ! m
t
n
T
d n dt
! m
t
1 m ! m
t T
d
dt
! m
t
1 m ! m
t
d p
T
C
nK C
T
1
n
T
0
u
1
m
0 m
n
T
0
0 m
1 m
1 m
m
2
0 m
2
T
0
0 m
1 m
2
1 m
2
m
1
T
0
0 m
1
0 m
1 m
1
m
m 2
m 0 m 1
2
1
( ) ( )
( )( ) ( )( )
( )( )
+ +
+ +
+ +
+ +
+ +
+ +
+ +
1
n
T
d
n dT pT
T
C
2 1
n
T
2
n
T
d n
T
C
2 1
T
2
T
d
T
C
2 1
T
2
T
d p
T
C
nK C
T
1
1
1
v
2 2
v 2
2
2
2
2 v 2
2
1
2
1 v 2
v 0 v 1

(13)

The integrated total cost function TC for the manufacturer and the retailers is the sum of
and
m
TC
r
TC . From equations (7), (8), (12), and (13), the integrated total cost per unit time
can be written as a function of and n, one has
2
T

( )
m r 2
TC TC n , T TC + =
( )
( )( )
+ +
+ + =
+ +
1
n
T
d
T
n
C
2 1
n
T
2
n
T
d
T
n
C nK C
T
1
1
r
2 2
r 2 r 0 r 1

( ) ( )
( )( ) ( )( )
( )( )
+ +
+ +
+ +
+ +
+ + +
+ +
+ +
1
n
T
d
n dT pT
T
C
2 1
n
T
2
n
T
d n
T
C
2 1
T
2
T
d
T
C
2 1
T
2
T
d p
T
C
nK C
T
1
1
1
m
2 2
m 2
2
2
2
2 m 2
2
1
2
1 m 2
m 0 m 1

(14)
34.7.9

If the retailers storage space limited to a maximum inventory size of W, the problem can
be stated as
Minimize: ( )
v d 2
TC TC n , T TC + =
Subject to: W fI g
r
=
The optimal inventory levels can be derived by using Lagrange multipliers, one has

( ) ( ) ( ) W fI n , T TC n , , T H
r 2 2
+ = (15)
4. SOLUTION PROCEDURE
The following heuristic technique (Yang and Wee, 2003) is used to derive the optimal n and

2
T
Step 1Since the number of delivery per order, n, is a discrete variable. Start by choosing a
discrete variable n, where n is any integer number equal or greater than 1.
Step 2Take the partial derivatives of ( ) n , , T H
2
with respect to and
2
T , and equating
the results to zero. The necessary conditions for optimality are
( )
0
T
n , , T H
2
2
=

and
( )
0
n , , T H
2
=

The simultaneous equations above can be solved for and
2
T .
Step 3Using found at step 2, substitute ( ( ) n T
2
( ) n T
2
,n) into equation (14) and find the
. ( ) ( ) n , n T TC
2
Step 4Repeat steps 2 and 3 for all possible n values until the minimum is
found. The
( ) ( ) n , n T TC
2
( ) ( )
* *
2
n , n T and ( ) ( )
* *
2
n , n T TC values constitute the optimal solution
and satisfy the following condition
( ) ( ) ( ) ( )
* *
2
* *
2
n , n T TC 1 n , 1 n T TC , and ( ) ( ) ( ) ( ) 1 n , 1 n T TC n , n T TC
* *
2
* *
2
+ +
Step 5Derive the and
*
T
1
*
T from equations (7) and (8), and the production quantity,
can be found.
1
pT
Step 6Derive the delivery quantity from equation (11).
If the objective function is convex, the following sufficient conditions must be satisfied:
34.7.10

0
T
H H
T
H
2
2
2
2
2
2
2
>
, and 0
T
H
2
2
2
>
, 0
H
2
2
>

Since the total cost is a very complicated function due to high-power expression of the
exponential function, it is not possible to show analytically the validity of the above sufficient
conditions, a search procedure is used instead.
5. NUMERICAL EXAMPLE
The following parameters are assumed. The manufacturers production rate p is
2,000,000(unit/year), the demand rate d is 500,000(unit/year). The ordering cost
000 , 2 C
r 1
= ($/order), the production set-up cost 000 , 100 C
m 1
= ($/cycle), the
quality-control cost ($/delivery), the transportation charge
($/delivery), the carrying cost for the retailer and for the manufacturer are
500 K
r 0
=
000 , 1 K
m 0
=
60 C
r 2
= ($/unit/year) and ($/unit/year) respectively, the deteriorated cost for the
retailer and for the manufacturer are
40 C
m 2
=
600 C
r
= ($/unit) and 400 C
m
= ($/unit). The scale and
shape parameters of the deterioration rate are 1 . 0 = and 2 = . The retailers maximum
limited storage space for each unit is W2,000 feet
3
, the retailers storage requirement for
each unit is f2 feet
3
.
By applying the solution procedure in Section 4, the results are derived as shown in Table 1.
Table 2 is the comparison of results for the above special conditions.

[See APPENDIX Table 1]

[See APPENDIX Table 2]

From Table 1, if all the conditions and constraints are satisfied, optimal solution can be
derived. In this example, the integrated optimal solution which minimizes TC is found when
the number of delivery per order, n, is 59. The optimal , and T value are 0.0295,
0.0885, and 0.01180 year, respectively. The optimal production quantity of the manufacturer
is 59,000 units, and the optimal delivery quantity of the retailer is 1,000 units. The optimal
integrated total cost per year is $2,500.708. The concept of lot splitting comes from the idea
of single order with multiple deliveries. It is analyzed from the perspective of how material
flows in the system. This analysis highlights the value of the lot splitting. The number of
deliveries is inversely proportional to the lot size.
1
T
2
T
Table 2 shows the results comparisons for the above special conditions. From the above
34.7.11

analysis, the following conclusions can be made
1. When the deterioration of item is not considered (i.e. 0 = ) when there is not
deterioration, the number of delivery decreases and the integrated total cost per year is
$8602 higher than the case when the deterioration is considered.
2. When the rate of deterioration is exponential rather than Weibull (i.e. 1 = ), the
integrated total cost per year is $128572 lower.
3. When the limited retailer storage space is not considered (i.e. 0 = ), the number of
delivery decreases and the integrated total cost per year is $585805 lower.
6. SUMMARY
Multi-lot size is one of the important policies of a successful enterprise. The study is
particularly useful for the inventory systems where the manufacturers and their retailers form
a strategic alliance with a mutually beneficial objective. To make it acceptable to both parties,
the integrated policy should offer some kind of profit sharing policy. The profit sharing policy
can be in the form of advanced payment and quantity discounts. As a result of this policy, both
the manufacturer and the retailer will benefit in the long run. The application of profit sharing
policy is an area worthy of studying for future research.
This study develops an optimal joint cost from the perspectives of both the manufacturer
and the retailer. The integrated two-stage inventory model with Weibull distribution
deteriorating items is assumed to have a constant demand rate and a limited retailer storage
space. A computer code is developed to derive the optimal solution, and a numerical example
is given to validate the results of the inventory system.
ACKNOWLEDGEMENTS
The authors wish to thank the referees for their constructive comments and suggestions on an
earlier version of the paper. This study is partially supported by the National Science Research
Council of the ROC.
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See APIEMS web site for reformating
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34.7.12

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34.7.13

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APPENDIX

( ) t I
m

m
I

0 t

1
t
2
t

1
T
2
T

Figure 1 Graphical representation for the manufacturers production system

34.7.14

( ) t I
r

r
I

0
n
T

n
T 2

n
T 3
. t

Figure 2 Graphical representation for the buyers inventory system

Table 1 The numerical results
The time intervalyear
n
1
T

4
10
2
T

4
10
T

4
10
d
TC
( )
3
10
v
TC
( )
3
10
TC
( )
3
10
1 25862.487 5 15 20 1280.402 50494.983 51775.023
2 13105.000 10 30 40 7800.040 25509.967 26290.007
3 8847.518 15 45 60 613.373 17191.602 17804.975
20 1496.233 100 300 400 330.040 3278.645 3608.683
58 381.071 290 870 1160 297.281 2203.558 2500.839
59
*
366.232 295 885 1180 296.989 2203.719
2500.708
*
*
708 . 2500
60 351.638 300 900 1200 296.707 2204.357 2501.064
The optimal n value that minimizes the integrated TC

34.7.15

Table 2 Comparison of results for special conditions
The time intervalyear
Special
conditions
No. of
delivery
n
1
T

4
10
2
T

4
10
T

4
10
d
TC
( )
3
10
v
TC
( )
3
10
TC
( )
3
10
Our example 59 295 885 1180 296.989 2203.719 2500.708
When 0 = 58 290 870 1160 297.241 2212.069 2509.310
When 1 =
61 305 914 1219 326.416 2045.720 2372.136
When 0 = 7 294 883 1177 301.791 1613.112 1914.903

34.7.16

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Proceedings of the Fifth Asia Pacific Industrial Engineering and Management Systems Conference 2004

COLLABORATION INVENTORY SYSTEM WITH LIMITED RESOURCES AND

; hence from equation (10),

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