CHAPTER 1

Introduction

1.1 Inventory modeling

Inventory modeling is concerned with the design of

production/inventory systems with the objective of minimizing the
costs associated with maintaining inventory and meeting changing
trends in demand. Inventory means store of idle resources that an
organization must maintain for smooth and efficient functioning of an
enterprise. The process of inventory maintenance itself represents
complex organized system which involves physical stock of inputs
procured through production or purchase, consumption of portion of
them and accumulation of balance for future use. In other words, the
balance between procurement and consumption of goods generates
inventory. To regulate and control the production process so as to
bridge the gap between the supply and demand, it is necessary to hold
inventory, though keeping high level of inventory is a costly exercise.
Therefore, over stocking without regard to the forecast or proper
estimate of demand and the evaluation of costs associated may also
lead to mismanagement. In other words, excess stock should hardly be
desired. This necessitates the planning and also controlling of
inventory system.
1.2 Classification of inventories: Generally inventory can be
classified into three categories:
 1.2.1 Raw Material inventories: These are the primary inventories
required in the manufacturing of parts, subparts of final product,
or final product. Any item which is not produced by the
organizations but is used in the production process of finished
goods (final output of the production) can be regarded as raw
material. For example cotton is used as raw material for cloth
production; wood is raw material for making furniture. Raw
material may or may not be the basic constituent of finished items.
The materials which are required for manufacturing but do not
constitute part of the finished item also fall in the category of raw
material, like nuts, bolts, tape, tools, etc.
1.2.2 Work in process: Production which has been released for
production process but has not reached the last stage of finished
goods ready for sale is called work in process. Basically, these
are the semi finished goods undergoing the production process
for finished goods. It may be noted that the items which has
completed the manufacturing process and are waiting for final
screening and acceptance test also fall in the category of work in
process.
1.2.3 Finished goods: These items are the final output of the company
which has also passed the screening and acceptance test and are
ready for sale.
1.3 Objectives of inventory management: An organization may be retail
establishment or manufacturer, it must maintain and control the
requisite inventory for expected reasons
 1.3.1 Protection from under stocking and overstocking: If the
inventories are too large, they lead to excess cost, wastage of man
power engaged in the work of maintaining inventory. On the
other side, if they are too small, the organization may lose the
opportunity to earn profit due to shortage of products. So one of
the main objectives of inventory management is to provide
shelter from under stocking and overstocking.
1.3.2 Balance between supply and demand: Any kind of irregularity
in the production process affects customer satisfaction level and
hence image of the organization. If due to any fault in the
production process or improper estimation of demand, an
organization fail to satisfy customer demand timely, the customer
may look else ware to satisfy his needs. So there is need of
continuous monitoring of inventory level to remain competitive
and avoid shortages.
1.3.3 To minimize the costs associated with inventory: The proper
estimate of stock of goods required helps to take decision when
the order be placed, the size of the order to be placed so that the
associated inventory costs can be minimized by avoiding spare
stock.
1.4 Factors affecting inventory control:
Demand
Supply/Production
Associated costs
1.4.1 Demand: The efficient management of inventory system which
fulfills the customer satisfaction at minimum cost is deeply affected
by the proper estimate of demand which is very fluctuating, depends
on various factors as also on specific situations. In one phase of the
production cycle, the products experience surplus demand while in
the other phase they experience slack demand. Demand also depends
upon the visibility of products in the market. Visibility is an
important determinant of demand it stimulates even the dormant
needs to become apparent and with increased visibility of the
product demand is generated even from unexpected quarters because
no one can find out who is harboring the dormant need and what
minimum threshold is required to convert that dormant need into an
actual demand. Demand can be constant, discrete and cyclic. It can
depend on various factors such as display of products, seasonal
demand, demand due to craving for new technology, etc. When shelf
space increases, it influences more customers. Levin et al. (1972)
and Silver and Peterson (1985) made useful observations in this
regard. They stated: the display of greater quantity of the same item
tends to attract more customers. It is because of a typical psychology
of the customers. The customers may have the feeling of getting a
wide range for their selection when a large amount is displayed or
stored. Datta and Paul (1990) focused on the analysis of the
inventory system which describes the demand rate as a power
function dependent on the level of on hand inventory and constant
holding cost. Deterministic model of perishable inventory with stock
 dependent demand and non- linear holding cost was developed by
Giri and Chaudhury (1998). They concluded that the nonlinear
holding cost affected the total cost. Teng and Chang (2005)
proposed economic production model for deteriorating item with
price and stock dependent demand. Singh and Singh (2010)
developed a supply chain model with stochastic lead time under
imprecise partially backlogging and fuzzy ramp-type demand for
expiring items. Widyadana and Wee (2011) developed production
inventory model with random machine breakdown and stochastic
repair time. He proved that demand rate is the most sensitive
parameter to the optimal total cost for stochastic models. Yadav,
Singh and Kumari (2012) developed an inventory model of
deteriorating items with stock dependent demand using genetic
algorithm in fuzzy environment. Chakraborty and Giri (2014)
developed an inventory model on lot sizing in a deteriorating
production system under inspections, imperfect maintenance and
reworks. They observed the effects of preventive measures and
rework process of defective items on optimal decisions. They found
that due to preventive maintenance actions the production balance
may shift to out of control system. The defective items produced
during out of control state are reworked at the end of the production
run.
1.4.2 Supply/Production: To regulate and control the supply
replenishment so as to maintain balance between the supply and
demand, it is necessary to keep track of the physical stock required
 time to time in planned manner absence of which leads to supply
chain inefficiencies and hence excessive inventory costs. The
various factors affecting the production are demand, deterioration
due to the natural phenomena of goods or due to external disaster,
production rate, availability of space for stocking, manufacturing
system like volume flexible system or imperfect production system,
etc. Khouja and Meraj (1995) extended the EPLS model with
variable production rate and imperfect production. Mandal and Maiti
(1999) worked on the inventory of damageable items with variable
replenishment rate and stock dependent demand. Skouri and
Papachristos (2003) enlightened the concept of optimal stopping and
restarting production times for an economic order quantity model
with deteriorating items and time dependent partial backlogging.
Konstantaras and Skouri (2010) presented a model by considering a
general cycle pattern in which a variable number of reproduction
lots of equal size was followed by a variable number of
manufacturing lots of equal size. They also studied the case where
shortages were allowed in each manufacturing and reproduction
cycle and similar sufficient conditions, as the non-shortages case,
were given.

1.4.3 Associated costs: The unnecessary inventory ties up money or

capital, increases holding cost, deterioration of material and also
there is risk of theft. On the other hand shortage of stock affects
sales operations, customer’s goodwill and hence may affect overall
profit due to divergence of sale. The cost of inventory includes
holding cost, the purchase cost, deterioration cost, ordering and set
up cost and shortage cost. Holding cost represents the cost for
keeping stock until it is consumed completely. Deterministic model
of perishable inventory with stock dependent demand and non-linear
holding cost was developed by Giri and Chaudhury (1998). They
were of the opinion that increase in the holding cost increases total
inventory cost. Roy (2008) developed an economic order quantity
model for deteriorating items in which deterioration rate and holding
cost are considered as linearly increasing function of time, selling
price is dependent on demand rate and shortages are completely
backlogged.
Shortage cost is the penalty cost per unit due to divergence of sale
in stock out situation. Bose, Goswami and Chaudhuri (1995)
proposed an EOQ model for deteriorating items with linear time
dependent demand rate, shortages under inflation and time
discounting. Sarkar and Pan (1994) studied effects of inflation and
time value of money on order quantity and allowable shortages.
Deterioration cost occurs when product cannot be used due to any
reason such as decay of products through time like fruits, vegetables
and unpreserved food etc; loss of worth due to change of technology
or trend. Ghare and Schrader (1963) introduced the feature of
deterioration in the inventory models and presented an inventory
model for exponentially decay in which stock is not only decreased
by demand alone but also by direct damageable, physical
 deterioration. Roy and Chaudhuri (2009) developed a production
inventory model under stock dependent demand, weibull distribution
deterioration and shortage.

1.5 Objectives of inventory modeling

Inventory modeling as it is and for this study is a distinctive approach
concerned with the design and control of production/inventory system
so as to provide decision support information of direct relevance to
the decision makers so as to help them in choosing the best from
among these various possibilities to arrive at better, effective and
rational decision so as to achieve specified goals.
Understanding of complicated real life system: It provides a
structure to understand the practical activity in mathematical
formulations whose study increases the understanding of real world
conditions.
Reduce cost: It evaluates the various available routes for production
and identifies the most feasible and practical one with objective to
derive the maximum output with minimum possible input. It attempts
to make optimum utilization of resources which obviously leads to
cost minimization process.
Enhances problem solving capability: Once the inventory model is
developed to represent the practical activity, its study provides
solution not only to the present state but also facilitates to extrapolate
to a practical situation which is far away from the problem, initially
described in the model. In other words, it can originate the different
 related models which are representative of different practical
situations and the study of new models provides insight about the new
practical situation and thus enhances the problem solving capability to
a degree that may be impossible in reality.
Optimal production policy: The study of inventory models provides
the essential tool for efficient management of inventory system which
determines the production quantity which is most cost effective and
also takes care of the customer satisfaction. Operations managers use
this extensively to schedule and assemble their production functions
and gain insight of strategic and financial planning.
1.6 Various inventory models
1.6.1 EOQ Model: The Economic order quantity model is most
fundamental inventory model developed by Ford W. Harris (1913).
The function of the model was to find out the optimum order
quantity that minimizes the inventory cost. In this model demand is
assumed to be constant and inventory is depleted at a fixed rate
until it reaches zero. Though the assumptions made were extremely
impractical if compared with real life standards, it is still a core
algorithm in the software packages sold to largest companies in the
world. Wilson (1934) extended Harris’s model and applied it
extensively and gave a method to find economic order quantity.
This model made a significant contribution in fundamental
understanding of the requirement of the effective inventory system
and development of advance models. Whitin (1957) worked on
stylish items deteriorating at the end of storage period. Buzacot,
 J.A. (1975) developed EOQ model for determining the economic
order quantity where the supplier offers a credit period to the
retailer to settle the account. Cheng, T.C.E. (1991) derived
economic order quantity model with demand dependent unit
production cost and imperfect production process. Sana (2010)
developed multi-item EOQ model of deteriorating items with
demand influenced by enterprises initiatives. Sana (2011) extended
an EOQ model for salesmen’s initiative with stock and price
sensitive demand.
1.6.2 EPQ Model:
The Economic Production Quantity Model (EPQ) was developed by
E.W. Taft (1918). EPQ model, in fact, is an extension of EOQ
model. There is, of course, difference between these two models.
Whereas EPQ model assumes that the company will produce its own
products or the products are going to be supplied to the company
while they are being produced by other company. On the other hand,
EOQ model says that the order quantity is received immediately and
completely after being ordered. This means that the products are
produced by another company, and as and when the orders are
placed these are shipped to the ordering company immediately. An
Economic Production Quantity Model was developed for
deteriorating items with constant production and stock dependent
consumption rate by Mandal and Phaujdar (1989). Production
policy for ameliorating/deteriorating items with ramp type demand
was derived by Goyal, Singh and Dem (2013). Sarkar and Moon
 (2011) developed an EPQ Model with inflation in an imperfect
production system. Dem and Singh (2012) investigated an EPQ
model for damageable items with multivariate demand and cost
flexibility using genetic algorithm. Giri and Bardhan (2015)
established a vendor buyer JELS model with stock dependent
demand and consigned inventory under buyer’s space constraint.
They derived integrated vendor buyer model to find optimal delivery
batch size and number of shipments and suggested coordination
mechanism between the vendor and buyer in an arbitrary ratio.
1.6.3 Volume flexible manufacturing system: Market mechanism has
been transformed considerably in view of the advancement in the
technology and quick communication. It places a tremendous
pressure in making the availability of products timely and even
instantaneous. The customers expect high quality products and
services, whenever and wherever they need them. As the emerging
market trends, the organizations try to attract customers by storing
and displaying the items in large quantity as also in influential
manner. All of us observe this in big malls and stores. A careful and
attractive storage and display of items in large quantity and in
different varieties influences and motivates the customers to purchase
more. This activity of purchasing more results in more demand. In
this way demand is affected by the stock stored and displayed. The
changing trend in demand for more, effects the production rate. In
view of the changing market trends, a number of scholars has been
attracted towards volume flexible inventory system in which
 production rate is a decision variable and depends on various factors.
Optimizing processing rate for volume flexible manufacturing system
has been established by Schweitzer, P.J. and Seidmann (1991). A
volume flexible production model for deteriorating item with trended
demand and shortages was developed by Sana, Goyal and Chaudhury
(2004). Dem and Singh (2013) developed a production model for
ameliorating items with quality consideration.
1.6.4 Imperfect production process: Even the best and most modern
production systems do produce imperfect and defective items in
varying quantities. It is very important to make a strategy as to how to
maintain and control the inventories of imperfectly produced items.
The imperfect items produced by the production systems are generally
sold at a reduced price rather than reworking or repairing them. Many
of the modern organizations do not prefer to spend their resources on
repairing and reworking the imperfect items because these may still
not look like the original. Moreover the imperfect items also undergo
obsolescence and deterioration during the intervening period awaiting
defect rectification. Also defective items lose their newness and
originality having undergone the process of defect removal. Therefore
many of the organizations prefer to sell some of the imperfect items
suitable for sale at a reduced price and other which are identified
below the predefined standard of quality are rejected and disposed
off. As many as five important experts --Rosenblatt and Lee (1986),
Lee and Rosenblatt (1987), Cheng (1991), Das and Sarkar (1999),
Chung and Hou (2003)-- studied the issue of imperfect quality items.
 They found that the presence of defective products motivates smaller
lot size. Assuming the defective items could be sold in a single batch
at a discounted price prior to receiving the next shipment, Salameh
and Jaber (2000) found that the economic lot size tends to increase the
average percentage of imperfect quality items. Sana, Goyal and
Chaudhury (2007) developed an inventory model with imperfect
production process in a volume flexible manufacturing system and
proved that profit is affected by selling the defective items at reduced
price. Goyal and Chaudhuri (2007) extended an economic production
lot size model in which production system produced perfect as well as
imperfect items. They have considered that the demand rate of perfect
quality items is stable, while the demand rate of defective products is
taken as function of reduction rate. Singh, Jain and Pareek (2014)
developed an imperfect quality items with learning and inflation under
two limited storage capacity.

1.6.5 Machine break down: Continuous monitoring of the production

equipment is essential in keeping the synchronization in the
production system and may harm the organization if the existing
uncertainty of the production equipment is not estimated and planned
accordingly. Therefore, researchers have attracted towards machine
breakdown effects in production inventory problem. Groenevelt,
Pintelon and Seidman (1992) studied the effects of machine
breakdown and corrective maintenance. In their further research, they
included safety stocks to meet the service level. Cheung and
Hausman (1997) incorporated preventive maintenance to production
inventory model. Both of them further developed a mathematical
model with random machine breakdowns and retained preventive
maintenance and safety stock. An EPQ mathematical model where
production shifts from an in-control state to an out-of control state
with a general shift distribution was developed by Wang (2004). An
EMQ model with machine failure and general repair time was
developed by Giri, Yun and Dohi (2005). Three of them suggested a
model to determine the production rate and production lot size to
minimize the expected total cost. An EMQ model with random
variables, corrective and preventive repair was developed by Giri and
Dohi (2005). A solution procedure and computational algorithms to
find the optimal production rate and lot size was proposed by them.
An EPQ model with deteriorating items, machine breakdown and fix
repair time was developed by Lin and Gong (2006). An Economic
Production Quantity (EPQ) model with scrap, rework, and stochastic
machine breakdowns was developed by Chiu, Wang and Chiu
(2007). They assumed some portion of the defective items to be
scrapped and the other part to be repairable. An EPQ model
considering production system that may shift from in-control state to
out-of control state or may breakdown at any random time during a
production period was developed by Chakraborty, Giri and
Chaudhuri (2008). They were of the view that preventive
maintenance is usually used to reduce machine breakdown.
Production Inventory Model with random machine breakdown and
 stochastic repair time was developed by Widyadana and Wee (2011).
They proved that stochastic repair model results in larger optimal
cost than fixed repair time model.
1.6.6 Inflation and time value of money: Most of the countries have
faced the effects of large scale inflation and time value of money.
Buzacott (1975) developed an EOQ model with inflation and
different type of pricing policies. Hou (2006) established an
inventory model for deteriorating items with stock dependent demand
and shortages under inflation and time discounting. Chung and Lin
(2001) investigated the effects of inflation, time value of money and
deterioration on inventory models. Singh et al. (2010) contributed on
an inventory model for deteriorating items with shortages and stock-
dependent demand under inflation for two-shops under one
management.
1.6.7 Reverse logistics: Reverse logistics now -a- days are being resorted to
and has been adopted by almost all progressive and ecologically
conscious corporations the world over and as such, adds a unique
dimension to the whole issue. In reverse logistics the flow of goods is
in reverse direction i.e. towards the company for varied reasons that
may relate to defective products that were initially supplied to the
customers and the company now want to recall these for refitting or
their disposal or for ecological considerations so as to re use the
products or to recycle these and extract value from these. Schrady
(1967) was the first who studied the problem on optimal lot sizes for
production/procurement and recovery. Nahmias and Rivera (1979)
have studied an EPQ variant of Schrady’s model (1967) with a
definite recovery rate for issues in the greening process. Richter
(1996a, 1996b, and 1997) and Richter and Dobos (1999) conducted
researches on a waste disposal model considering the returned rate as
a decision variable. They gave the optimal number of production and
reproduction batches depended on the returned rate. The problem of
a production /remanufacturing system with constant demand which is
satisfied by non instantaneous production and remanufacturing for
single and multiple remanufacturing and production cycle was
investigated by Dobos and Richter (2003, 2004). Further Dobos and
Richter (2006) extended their previous model and assumed that the
quality of collected returned items is not always suitable for further
repairing. An optimal lot size for the finite production model with
random defective rate, the rework process, and backlogging was
determined by Chiu (2003). Chiu (2007) developed an EPQ model
with scrap, rework, and stochastic breakdowns. The models
developed by Dobos and Richter (2003, 2004) was further extended
by El Saadany and Jaber (2010). It was done by assuming that the
collection rate of returned items is dependent on the purchasing price
and the acceptance quality level of these returns. It means that the
flow of used/returned items increases as the purchasing price
increases, and decreases as the corresponding acceptance quality
level increases. A general reverse logistics inventory model was
developed by Alamri (2010). An inventory model on short life-cycle
deteriorating product remanufacturing in a green supply chain model
 was developed by Chung and Wee (2011). Singh and Neha (2012)
derived optimal returned policy for a reverse logistics inventory
model with backorders.
1.6.8 Trade credit: The assumption of traditional EOQ model is that
retailer must pay for the items as soon as the items are received. But
it does not happen in real life. The supplier generally offers the
retailer a delay period that is trade credit period, in paying for the
amount of purchasing cost. Before the end of trade credit period, the
retailer can sell the goods to accumulate revenue and earn interest on
it. The research of Aggarwal and Jaggi (1995) resulted in the
ordering policies of deteriorating items under permissible delay in
payments. The inventory replenishment policy for deteriorating items
under permissible delay in payments was developed by Chung
(2000). The research of Shah (2006) resulted into the development of
inventory model for deteriorating items and time value of money for
a finite time horizon under the permissible delay in payments. Singh
and Jain (2009) conducted researches on reserve money for an EOQ
model in an inflationary environment under supplier credits. Optimal
pricing and ordering policies for deteriorating items under inflation
and permissible delay in payments was investigated and developed
by Hou and Lin (2013). They derived replenishment policies over a
finite time horizon under two different trade credit period
circumstances.
1.7 Outline /Structure of the thesis:
There exists a serious gap in several existing inventory models and
practices in realistic situations. Classical inventory models are based
on idealistic situations of constant demand, fixed production rate. In
recent years, researchers have been attracted towards the design and
study of such inventory models as undertake the combinations of
some expected realistic features that usually arise while working on
the optimal production policy which is cost effective. The objective of
the present research work is to develop and evaluate some inventory
models which add to the understanding of present realistic challenges
facing the business world as regards the inventory management and
also explore more in the field of inventory modeling. The various
factors affecting the production are demand, deterioration of goods
due to the natural phenomena or due to external disaster, production
rate, availability of space for stocking, manufacturing system like
volume flexible system or imperfect production system, reverse
logistic, reliability of the manufacturing system, etc. To study the
effect of various above stated factors in various combinations on the
production system, our research work designs such inventory models
that can complement well with the flexible manufacturing systems as
also some other practical combinations. The objective of my research
work is to develop and evaluate some inventory models with realistic
combinations as given hereunder. I propose to fulfill the objective as
above and assess production inventory models under the following
combinations.
1 Volume flexible manufacturing system
 2 Implications of reverse logistics
3 Integrated systems.
4 Trade credit policies.
5 Imperfect production processes
6 Reliability considerations
To construct inventory models, we formed various differential equations
along with the boundary conditions. Various concepts of differential
calculus and other cost minimization techniques are used to obtain
optimum solutions. Mathematical software like Mathematica, along with
various algorithms like computational numerical methods have been
useful to evaluate the models. The proposed research work is organized
in six chapters on the basis of different models which are as under.
Chapter 1: The first chapter provides brief coverage of the introduction
of the topic inventory modeling, objectives of inventory management,
various factors affecting inventory control. This chapter describes various
inventory systems classical as well as systems of current study. It
provides review of literatures prescribed by different authors in all
relevant areas of inventory modeling like EOQ, EPQ, volume flexible
manufacturing system, imperfect production process, reverse
manufacturing, inflation and time value of money, trade credit, etc. The
significance of this chapter is to describe the work done by various
authors so as to discuss the scope and gradual development of the
research done in the field of inventory modeling.
Chapter 2: The second chapter provides a distinctive approach to study
the economic production quantity model, its relationship with EOQ
model and other lot size models. Production inventory model for a
deteriorating item over infinite planning horizon is developed in the
present chapter where the demand rate is a function of on hand inventory
and production rate is taken as power function of on hand inventory. By
keeping the traditional parameters of unit item cost and ordering cost as
constant, the comparative study of linear and non- linear holding cost is
discussed to observe the impact of non-linearity of holding cost in
flexible manufacturing system. It is observed that when non linear
holding cost is incorporated in the inventory model, it leads to excess
total inventory cost. The chapter further extends the model by including
shortages also. The objective of this chapter is to facilitate further work
and understanding to study the work done by various authors in the field
of inventory.
Chapter 3: The third chapter further extends the inventory model already
developed in chapter 2. The study investigates the impact of
remanufacturing in an integrated production inventory model consisting
of forward and reverse manufacturing. The flexibility of production
system is retained during forward manufacturing to make the model more
realistic. The model derives the optimum production policy which
minimizes the total cost incurred. To explain and illustrate the theory, the
results are discussed with a numerical example. The particular cases of
the model are discussed in brief. The significance of this chapter is to
study whether reverse manufacturing affects the total average cost and
discusses management stand point in connection with reverse
manufacturing.
Chapter 4: This chapter derives a reverse logistic inventory model with
imperfect production, stock dependent demand, flexible manufacturing
and shortages over infinite planning horizon. The objective of this
chapter is to frame the joint policy for optimal production, amount of
remanufacturing, collection of reusable items and collection as well as
disposal of defective items which minimizes the total cost of the
inventory system under consideration. The importance of this model is to
address various expected realistic features simultaneously so as to frame
production policy which not only reduces cost but also takes care of the
requirement of environmental protection. To make the model more
realistic, both the cases of linear and nonlinear holding costs have been
discussed. The results are discussed with a numerical example to
illustrate the theory.
Chapter 5: All the models discussed in previous chapters were
deterministic models in which we allowed flexibility but assumed the
nature of flexibility also known beforehand. In this chapter, we shifted to
study stochastic production inventory model over infinite planning
horizon with flexible but unreliable manufacturing process and stochastic
repair time. Demand depends on stock storage and displayed and during
the sale period it also depends on reduction in selling price. The
production rate is regulated by the extent of demand. Reliability of the
production equipment is assumed to be exponentially decreasing function
of time. The Repair time is estimated and calculated by using uniform
probability density function. We optimized expected profit function and
discussed the impact of increase or decrease of production rate on
production run time. We also studied the impact of production up time
and production rates on expected profit using numerical example.
Chapter 6: This chapter establishes reverse logistic production inventory
model in inflationary conditions and permissible delay in payment over
finite planning horizon. In this model production system is assumed
flexible, items are returnable and returnable items are remanufactured.
We derived optimal production policy for integrated model consisting of
both forward and reverse manufacturing system in inflationary
conditions. We discussed the benefits of undertaking the reverse system
by business organizations. We also discussed the further scope of the
research and limitations of the model.