Hendrix, E.M.T.

Hnich, B.

Prestwich, S.

Rossi, R.

Tarim, S.A.

English

NARCIS 

On a CP approach to solve a MINLP inventory model

Name not available

Wageningen Yield 

Proceedings of TOGO 2010, pp. 1 – 4.
On a CP approach to solve a MINLP inventory model ∗
Roberto Rossi,1 S. Armagan Tarim,2 Brahim Hnich,3
Steven Prestwich4 and Eligius M. T. Hendrix5
1Logistics, Decision and Information Sciences, Wageningen UR, the Netherlands roberto.rossi@wur.nl
2Department of Management, Hacettepe University, Turkey armtar@yahoo.coml
3Faculty of Computer Science, Izmir University of Economics, Izmir, Turkey brahim.hnich@ieu.edu.tr
4Cork Constraint Computation Centre, University College, Cork, Ireland s.prestwich@4c.ucc.ie
5Computer Architecture, Málaga University, Spain eligius.hendrix@wur.nl
Abstract One of the most important policies adopted in inventory control is the replenishment cycle pol-
icy. Such a policy provides an effective means of dampening planning instability and coping with
demand uncertainty. We describe a constraint programming approach for computing optimal re-
plenishment cycle policy parameters under non-stationary stochastic demand, ordering, holding
and shortage costs. Our solution approach exploits the convexity of the cost-function to dynamically
compute during search the cost associated with a given decision variable assignment. By using our
model we gauge the quality of an existing approximate mixed integer linear programming approach
that exploits a piecewise linear approximation for the complex cost function. Furthermore, our
computational experience shows that our approach can solve realistic instances in a fraction of a
second.
Keywords: constraint programming, replenishment cycle policy, non-stationary demand, shortage cost, MINLP
1. Introduction
Much of the inventory control literature concerns the computation of optimal replenishment
policies under demand uncertainty. One of the most important policies adopted is the (R,S)
policy (also known as the replenishment cycle policy). A detailed discussion on the characteris-
tics of (R,S) can be found in deKok [3]. In this policy a replenishment is placed every R periods
to raise the inventory position to the order-up-to-level S. An important extension for existing
stochastic production/inventory control problems consists of incorporating a non-stationary
demand process. Under this assumption the (R,S) policy takes the non-stationary form (Rn,Sn)
where Rn denotes the length of the n
th replenishment cycle and Sn the corresponding order-
up-to-level. To compute the near optimal (Rn,Sn) policy values, [5] apply a mixed integer
programming (MIP) formulation using a piecewise linear approximation to a complex cost
functionwith fixedprocurement cost each time a replenishment order is placed. So far no com-
plete approach exists for computing (Rn,Sn) policy parameters under a shortage cost scheme.
∗This work has been funded by grants from the Spanish Ministry of Science and Innovation (TIN2008-01117). Eligius Hendrix
is a fellow of the Spanish "Ramón y Cajal" contract program, co-financed by the European Social Fund. B. Hnich and A. Tarim
are supported by the Scientific and Technological Research Council of Turkey under Grant No. SOBAG-108K027. A. Tarim is
supported by Hacettepe University-BAB.
2 Roberto Rossi, S. Armagan Tarim, Brahim Hnich, Steven Prestwich and Eligius M. T. Hendrix
In fact, [5] show that the cost structure is complex in this case and differs significantly from the
one under a service level constraint. In this work, we give an exact constraint programming
[1] (CP) formulation of the (Rn,Sn) inventory control problem under shortage cost scheme.
Our approach embeds dedicated cost-based filtering methods [4] to improve performances
of the search. Our contribution is two-fold: we can now efficiently obtain provably optimal
solutions for the MINLP (Rn,Sn) inventory control problem under shortage costs and we can
gauge the accuracy of the piecewise linear approximation proposed by [5]. Computational
results shows the effectiveness of our approach.
2. From a stochastic to a deterministic equivalent model
We consider the single stocking location, single product inventory problem over a finite plan-
ning horizon of N periods. The demand dt in period t is assumed to be a normally distributed
random variable with known probability density function (PDF) gt(dt). Demand is assumed
to occur instantaneously at the beginning of each period. The mean rate of demand may vary
from period to period. Demands in different time periods are assumed to be independent.
Demands occurring when the system is out of stock are assumed to be back-ordered and
satisfied as soon as the next replenishment order arrives.
In the general multi-period production/inventory problemwith stochastic demands we are
interested in finding the timing of the stock reviews and the size of non-negative replenishment
orders, Xt in period t, which minimize the expected total cost over a finite planning horizon
of N periods:
min E{TC} =
∫
d1
∫
d2
. . .
∫
dN
N
∑
t=1
(
aδt + vXt + hI
+
t + sI
−
t
)
g1(d1) . . . gN (dN)d(d1) . . . d(dN)
(1)
subject to, for t = 1 . . . N,
Xt > 0⇒ δt = 1 (2)
It =
t
∑
i=1
(Xi − di) (3)
I+t = max(0, It) (4)
I−t = −min(0, It) (5)
Xt , I
+
t , I
−
t ∈ R
+ ∪ {0}, It ∈ R, δt ∈ {0, 1} (6)
where
dt : the demand in period t, a normal random variable with PDF gt(dt),
a : the fixed ordering cost,
v : the proportional direct item cost,
h : the proportional stock holding cost,
s : the proportional shortage cost,
δt : a {0,1} variable that takes the value of 1 if a replenishment occurs in
period t and 0 otherwise,
It : the inventory level at the end of period t, −∞ < It < +∞, I0 = 0
I+t : the excess inventory at the end of period t carried over to the next period,
I−t : the shortages at the end of period t, or magnitude of negative inventory,
Xt : the replenishment order placed and received in period t, Xt ≥ 0.
Let R(i, j) denote a replenishment cycle that schedules an inventory review at period i to cover
subsequent demand up to period j with cost as a function of the opening inventory level S:
j
∑
k=i
(
hzα(i,k)σi,k + (h + s)σi,k[φ(zα(i,k))− (1−α(i, k))zα(i,k)]
)
, (7)
where Gi,k(·) and σi,k denote, respectively, the cumulative distribution function and the stan-
dard deviation of di + . . . + dk; α(i, k) = Gi,k(S); and zα(i,k) = Φ
−1(α(i, k)). Φ(·) and φ(·)
denote, respectively, the standard normal CDF and PDF. Therefore we have j − i + 1 cost
components: the holding and shortage costs at the end of period i, i + 1, . . . , j. Since we can
On a CP approach to solve a MINLP inventory model 3
prove that the cost function to be convex, for each possible replenishment cycle we can effi-
ciently compute the optimal S∗ that minimizes it by using gradient based methods for convex
optimization.
3. CP approach to solve the deterministic equivalent model
A deterministic equivalent (see [2]) CP formulation of the model is constructed. The expected
total cost for R(i, j) with opening inventory level Si, is iteratively computed by a special-
purpose constraint objConstraint(·) which uses a slightly extended version of Eq. (7). Intu-
itively, within this constraint the expected total cost for a certain replenishment plan will be
computed as the sum of all the expected total costs for replenishment cycles in the solution,
plus the respective ordering costs.
A deterministic equivalent CP formulation is then
min E{TC} = C (8)
subject to
objConstraint
(
C, I˜1 , . . . , I˜N , δ1 , . . . ,δN , d1 , . . . , dN , a, h, s
)
(9)
and for t = 1 . . . N
I˜t + d˜t − I˜t−1 ≥ 0 (10)
I˜t + d˜t − I˜t−1 > 0 ⇒ δt = 1 (11)
I˜t ∈ R, δt ∈ {0, 1}. (12)
Decision variable I˜t represents the expected closing inventory level at the end of period t and
d˜t represents the expected value of demand in a given period t.
The objective function (8) gives expected total cost over theplanninghorizon. objConstraint(·)
dynamically computes buffer stocks and assigns to C the expected total cost related to a given
assignment for replenishment decisions,depending on the demanddistribution in eachperiod.
In order to propagate objConstraint(·), during the search we wait for a partial assignment
involving some or all δt variables. We look for an assignment where there exists some i s.t.
δi = 1, some j > i s.t. δ j+1 = 1 and for every k, i < k ≤ j, δk = 0. This uniquely identifies a
replenishment cycle R(i, j).
There may be more replenishment cycles associated to a partial assignment. If we consider
each R(i, j) identified by the current assignment, it is easy tominimize the convex cost function
already discussed, and to find the optimal expected closing inventory level I˜ j for this particular
replenishment cycle independently of the others.
By independently computing the optimal optimal expected closing inventory level for every
replenishment cycle identified, two possible situations may arise: (i) the closing inventory
levels obtained satisfies every inventory conservation constraint (Eq. (10)); or (ii) for some
couple of subsequent replenishment cycles this constraint is violated. In other words, we
observe an expected negative order quantity. If the latter situation arises, we can adopt a
fast convex optimization procedure to compute a feasible buffer stock configuration with
minimum cost.
The algorithm for computing optimal buffer stock configurations in presence of negative
order quantity scenarios simply exploits the linear dependencybetween the opening inventory
level of the second cycle and the expected closing inventory level of the first cycle. Due to
this dependency the overall cost is still convex; we can apply convex optimization to find the
optimal buffer stock configuration. Note that this reasoning still holds in a recursive process.
Therefore, we can optimize buffer stock for two subsequent replenishment cycles, thenwe can
treat these as a new single replenishment cycle, since their buffer stocks are linearly dependent,
and repeat the process in order to consider the next replenishment cycle if a negative order
quantity scenario arises. A lower bound for the expected total cost associated to the current
partial assignment for δt, t = 1, . . . , N variables is now given by the sum of all the cost
components C(Si, i, j), for each replenishment cycle R(i, j) identified by the assignment.
4 Roberto Rossi, S. Armagan Tarim, Brahim Hnich, Steven Prestwich and Eligius M. T. Hendrix
4. Numerical experience
The described approach was first compared to the one descibed in and the set of instances
presented in [5]. For these instances, a piecewise linear approximation with seven segments
usually provides a solution with a cost reasonably close to optimal (<1% difference); while
using two segments produces a cost difference up to about 7%. The next experiment concerns
a single problem with period demands generated from seasonal data with no trend: d˜t =
50[1 + sin(pit/6)]. In addition to the “no trend” case (P1) we also consider three others:
(P2) positive trend case, d˜t = 50[1 + sin(pit/6)] + t; (P3) negative trend case, d˜t = 50[1 +
sin(pit/6)] + (52− t); (P4) life-cycle trend case, d˜t = 50[1 + sin(pit/6)] +min(t, 52− t).
In each test we assume an initial null inventory level and a normally distributed demand for
every periodwith a coefficient of variationσt/d˜t for each t ∈ {1, . . . , N}, where N is the length
of the considered planning horizon. We performed tests using four different ordering cost
values a ∈ {50, 100, 150, 200} and two different σt/d˜t ∈ {1/3, 1/6}. The planning horizon
length takes even values in the range [20, 38]. The holding cost used in these tests is h = 1 per
unit per period. Our tests also consider two different shortage cost values s = 15 and s = 25.
Direct item cost is v = 2 per unit produced.
Our CP approach generally requires only a fraction of a second to produce the optimal
solution. Only in 6 instances the optimal solution was not produced within the given time
limit of 5 seconds. Nevertheless, it should be also noted that the worst case running time for
our approach over the whole test bed was 6, 77 minutes. Therefore even in the few cases in
which an optimal solution is not found in a less than 5 seconds, our CP model provides a
reasonable running time.
5. Conclusions
We developed a constraint programming approach able to compute optimal replenishment
cycle policy parameters under non-stationary stochastic demand, ordering, holding and short-
age costs. In our model we exploited the convexity of the cost-function during the search to
dynamically compute the cost associated with a given decision variable assignment. By us-
ing our approach we assessed the quality of an existing approximate mixed integer linear
programming approach that exploits a piecewise linear approximation for the complex cost
function. Our computational experience show the effectiveness of our approach.
References
[1] K. Apt. Principles of Constraint Programming. Cambridge University Press, Cambridge, UK, 2003.
[2] J. R. Birge and F. Louveaux. Introduction to Stochastic Programming. Springer Verlag, New York, 1997.
[3] A. G. de Kok. Basics of inventory management: part 2 The (R,S)-model. Research memorandum, FEW 521,
1991. Department of Economics, Tilburg University, Tilburg, The Netherlands.
[4] F. Focacci, A. Lodi, andM.Milano. Cost-based domain filtering. In Proceedings of the 5th International Conference
on the Principles and Practice of Constraint Programming, pages 189–203. Springer Verlag, 1999. Lecture Notes in
Computer Science No. 1713.
[5] S. A. Tarim and B. G. Kingsman. Modelling and Computing (Rn,Sn) Policies for Inventory Systems with
Non-Stationary Stochastic Demand. European Journal of Operational Research, 174:581–599, 2006.


Basics of inventory management: part 2 The (R,S)-model.

Cost-based domain filtering.

Introduction to Stochastic Programming.

Modelling and Computing (Rn,Sn) Policies for Inventory Systems with Non-Stationary Stochastic Demand.

Principles of Constraint Programming.

On a CP approach to solve a MINLP inventory model

Abstract

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