Adaptive Limits in Inventory Control

Adaptive Limits in Inventory Control
Author(s): Samuel Eilon and Joseph Elmaleh

Source: Management Science, Vol. 16, No. 8, Application Series (Apr., 1970), pp. B533-B548
Published by: INFORMS
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MANAGEMENT SCIENCE
Vol. 16, No. 8, April, 1970
Printed in U.S.A.
ADAPTIVE LIMITS IN INVENTORY CONTROL*

SAMUEL EILON AND JOSEPH ELMALEH
Imperial Collegeof Science and Technology
In conventional reorder policies for inventory control, stocks are allowed to
fluctuate between two prescribedlimits: a lower limit correspondingto a safety stock
to guard against runouts, and an upper limit to which the stock is replenished from
time to time. Methods have been suggested for computing optimal upper and lower
limits for the case of stationary demand patterns.
The adoption of two rigid limits for controlling inventories for nonstationary
demand patterns, which include trends and seasonal fluctuations, is clearly not satis-
factory. Published papers in inventory control rarely devote enough attention to the
need for a link between forecasting and a reorder policy.
A method is suggested in this paper for computing adaptive control limits based
on a forecasting procedure that takes account of seasonal fluctuations and trends.
The method has been simulated for inventory models with varying parameters.
Invariably it has yielded results which were equal to and usually better than those
obtained by the optimal "fixed-limits" method. For example, in the case of a normal
demand distribution, and a given level of satisfying demand, the reduction in costs re-
sulting from the adaptive control procedure was found to be well over 30%.
Introduction
The essence of inventory control is to determine when to order and how much to
order new stock. Most of the literature is concerned with the following alternative
policies:
s,S-also known as the two-bin system, where an order is placed when the stock
level declines to s, the order quantity being Q = S - s; the stock level fluctuates between
the two limits s and S, achieving the upper limit when replacement is instantaneous.
S, T-also known as the cyclical review system, where replenishment is effected
every interval T to bring the stock level to an upper limit S.
s,S, T-this is essentially an s,S system, except that review of the stock is not
carried out continuously but at every time interval T; if the stock limit is then below
s, an order for replenishment is made for Q S - s.
There has been a considerable amount of research into optimization of inventory
policies. Soine of the main conclusions may be briefly summarized as follows:
1. It is impossible to draw a universal comparison between various inventory
policies, since the behaviour of several depends on the initial conditions of the system
in question.
2. Given a set of initial conditions, it can be shown that at least one of the optimal
policies must be of the s,$ type.
3. In the case of a stationary demand pattern, an infinite horizon, a discounting
factor (a < 1) and when a backlog of unsatisfied demand is allowed, an optimal
s,S policy can be determined, irrespective of initial conditions.
4. When demand patterns change with time, when lead-times are variable, and
when unsatisfied demand is lost, the mathematical treatment for formulating an
optimal inventory policy becomes extremely complicated, very often insoluble. Wag-
ner et al [4], who investigated 800 different inventory cases, demonstrated the compu-
tational difficulties involved in determining optimal control limits and suggested ap-
proximate empirical solutions.
* Received January, 1968; revised May 1969.
B-534 SAMUEL EILON AND JOSEPH ELMALEH
TABLE 1
Case a
Cycle time = 2 Cycle time = 4 Cycle time = 6
Adap- Fixed Fixed Fixed Adap- Fixed Fixed Fixed Adap- Fixed Fixed Fixed
tive limits limits limits tive limits limits limits tive limits limits lirmits
limits 4= 0 k =1 =2 limits k=0 k= 4k = 2 limits k=0 k=1 k= 2
Mean inventory of 138 128 179 235 188 176 217 270 229 225 278 319
finished goods
Standard deviation 64 62 55 13 92 86 86 77 110 109 100 103
of finished goods
Mean quantity of 173 171 184 198 182 187 197 202 191 199 199 203
work in progress
of work in prog-
ress
raw materials
of raw materials
Mean total inven- 481 448 534 643 582 565 640 738 595 691 782 865
tories and quan-
tity of work in
progress
Standarderrorof 17 - - - 24 - - - 30 - - -
forecast
Percentage of de- 89 86 94 98 93 - 94 96 100 96 96 99 99
mand of finished
goods satisfied
Percentage of de- 88 88 95 99 94 95 97 1O3 97 96 100 100
mand of raw ma-
terials satisfied
Ordering costs 374 356 373 416 217 225 203 221 158 153 158 154
Run-out costs 3407 3709 1709 450 2034 1697 1049 130 1137 1193 0 0
Total costs 12680 12030 12370 14140 14530 13520 15000 17240 17030 16600 18800 21350
Demand: Normal distribution-Mean 50; Standard deviation 5. Trend: None. Seasonality: None. Lead time: Normal
distribution-Mean 4; Standard deviation 1.
In another study [1] of stock control for a few raw materials in a firm belonging to
the food industry, we investigated through simulation the performance of the above
mentioned policies and several others, namely:
Q, T-similar to S, T, except that replenishment is effected by a fixed reorder quan-
tity Q (instead of bringing up the stock level to an upper limit S), the value of Q is
determined by the classical square root formula for minimum total costs per unit.
T,s, S-this is a combination of the s,S and the S, T policies, namely replenish-
ment is provided every interval T to bring the stock level up to the upper limit S,
but if in between review periods the stock declines to s, an order for a replenishment
of S - s is made.
T, s, Q-this is a combination of the s, S and Q, T policies and therefore similar to
T, s, S except that the replenishment takes the form of a fixed quantity Q.
Of these various methods the T, s, S was found to be most promising and it was
then decided to explore the advantages of introducing an adaptive element into the
policy by allowing the main parameters s and S to be redetermined periodically.
The Model
The inventory system studied here was assumed to consist of three stages in series:
-Inventory of raw materials
-Work in progress
-Inventory of finished goods
ADAPTIVE LIMITS IN INVENTORY CONTROL B-535
TABLE 2
Case b
Cycle time - 2 Cycle time = 4 Cycle time - 6
Adap- Fixed Fixed Fixed Adap- Fixed Fixed Fixed AdaP- Fixed Fixed Fixed
tive limits limits limits tive limits limits limits tive limits limits limits
limits k= 0 k= 1 k= 2 limits k= 0 k =1 k= 2 limits k=0 k-I k= 2
finished goods
of finished goods
Mean quantity of 513 418 462 511 567 450 497 556 573 493 528 564
work in progress
of work in prog-
ress
raw materials
of raw materials
AMean total inven- 1348 1161 1402 1696 1620 1472 1744 2052 1968 1892 2138 2397
tories and quan-
tity of work in
progress
Standard error of 15 - - - 23 - - - 28 - - -
forecast
Percentage of de- 86 70 77 85 92 78 84 89 94 83 88 93
mand of finished
goods satisfied
Percentage of de- 87 71 77 86 93 78 84 90 97 85 89 94
mand of raw ma-
terials satisfied
Ordering Costs 388 322 334 373 232 187 200 222 164 146 161 158
Run-out Costs 12840 26750 20580 13040 7511 19910 14410 10240 4996 15310 10620 6241
Total Costs 36380 48520 48250 47870 39810 51480 52970 55670 48570 59370 61660 64230
Demand: Normal distribution with trend superimposed-Mean 150, Standard deviation 58. Trend: Linear, rate of 5%
a year. Seasonality: None. Lead time for finished goods: Normal distribution-Mean 4, Standard deviation 1.
The investigation took the form of a simulation over 500 periods for some 200 cases
which were covered in the course of this research. The varying parameters included
new demand distributions with several coefficients of variation, truncated normal'
and gamma lead-time distributions, seasonal demand factors, cycle times of different
lengths and several safety factors. The results reported in this paper relate to the
following three cases:
(a) Normal demand distribution, no trend, no seasonal variations, normally dis-
tributed lead-times.
(b) Normal demand distribution with exponential trend superimposed, seasonal
factors based on a particular industrial case study, normally distrituted lead-times.
(c) Normal demand distribution with linear trend superimposed, no seasonal
variations, normally distributed lead-times.
Details of the parameters for the demand distributions and the trends for the three
cases are given in Tables 1-3. Each of the three cases was investigated for the three
values of the cycle time T = 2, 4, 6 (i.e. shorter, equal and longer than the mean
lead-time L respectively).
Two alternative T , s,S policies were defined:
Fixed limits-where s and S were determined at the beginning of the simulation
run, and kept fixed throughout. s was taken as the expected demand D during the
I To preventcaseswherethe orderarrivesbeforeit is placed.
TABLE 3
Ca8e c
Cycle time = 2 Cycle time = 4 Cycle time = 6
Adap- Fixed Fixed Fixed Adap- Fixed Fixed Fixed Adap- Fixed Fixed Fixed
tive limits limits limits tive limits limits limits tive limits limits limits
time k =0 k= k=2 limits k-0 k= I k -- 2 limits k=0 k =1 k=2
finished goods
of finished goods
Mean quantity of 258 247 255 269 288 252 280 287 317 280 288 296
work in progress
of work in prog-
ress
raw materials
of raw materials
Mean total inven- 754 761 902 1083 848 944 1100 1258 1047 1144 1273 1423
tories and quan-
tity of work in
progress
Standard error of 17 - - - - - - - _ - - -
forecast
Percentage Vf de- 83 77 81 86 89 80 86 88 91 86 89 91
mand of finlshed
goods satisfied
Percentage of de- 84 77 82 87 n92 80 88 89 96 88 89 93
mand of raw ma-
terials satisfied
Ordering Costs 429 350 355 372 269 186 224 209 175 150 156 161
Run-out Costs 8251 11060 9221 6859 5231 9593 6655 5659 4289 6809 5381 4447
Total Costs 21250 26650 28920 31870 22090 31290 32390 36640 27230 33950 36440 40320
Demand: Normal distribution-Mean 80; Standard deviation 51 (with trend superimposed). Trend: Exponential
seasonality, Factors taken from an industrial product. Lead time: Normal distribution-Mean 4; Standard deviation 1.
lead-time plus some safety factor described by the coefficient k in the expression
s = D + kd
where d = mean demand per lead time. Three values for k were used (k = 0,1, 2).
S was taken as s plus the expected demand dulringthe cycle time T (the stock review
being performed every cycle) or during the lead-time L, whichever was the shorter.
Adaptive limits-the method for determining s and S was similar to that used in
fixed limits policy, except that the demand D and d, as well as the demand during the
cycle time T, were based on forecasts made each period (instead of using expected
values), and the upper and lower limits S and s were modified accordingly; s = 0
was used in computing s.
To account for the possiblie seasonal pattern in demand a somewhat modified rule
of that suggested by Winters [5] was employed for the adaptive policy (see Appendix
1). The modifications consisted of:
1. Introduction of a monitoring subroutine for the periodical testing and reassess-
ment of the smoothing constants (This is a safer procedure than any of the tracking
signals tested. In terms of computer time, it takes 0.8 minutes on an IBM 7090 com-
puter to test 125 combinations of smoothing constants.)
2. Special treatment for cases where negative demand values are forecast. In this
case there are two possibilities:
(i) Equate the forecast to 0.
(ii) For practical purposes, treat the forecast as 0, but leave the negative value in
the forecast equation.
The choice as to which method to adopt depends on the relative forecasting error
incurred and on the possible effect on production levels. For the three cases reported
in this paper no negative forecasts were recorded.
Results
Figures 1-3 show some results using the adaptive policy in the three cases (a), (b)
and (c). To economize in space the diagrams cover some 240 periods, starting at period
60 in the simulation run. The top two diagrams in each figure show the adaptive con-
trol limits for raw materials and for finished goods respectively and the curve in
between shows the fluctuations in available stock (this curve is based on stock figures
at the end of each period and is a reflection of the last event to occur in that period;
the curve describes the level of available stock, which includes stock on hand and stock
on order;in the case of raw materials, the available stock level is recorded after orders
have been placed and this is why it sometimes appears to hug the upper control
limit, whereas the curve for available stock for finished goods records the level before
the orders are placed, resulting in the curve hugging the lower limit).
As can be seen from Figure 1, in the case of a stationary demand pattern, the
adaptive limits have little to offer in comparison with well-chosen fixed limits, since
they themselves converge to almost horizontal parallel lines. Figure 2 shows how the
adaptive limits cope with the linear trend and Figure 3 clearly demonstrates their
use for controlling a seasonal product.
In the lower diagram of Figures 1-3 three graphs are given for the raw materials
stock on hand, for the finished goods stock on hand, and for the market demand
respectively. It can be seen that there is a demand for finished goods generated by
the market each period. The frequency of demand for raw materials, however, is
not that regular, since it depends on orders which have already been placed and on
their relative size.
Figures 4(a), 4(b) and 4(c) are a cost comparison between the fixed and adaptive
control limits. The following cost parameters, which were chosen arbitrarily for the
purpose of an illustration, were taken:
1. Cost of unit of finished goods: ?1.2.
2. Storage costs: ?0.08 per unit per period.
3. Interest costs on capital tied up: 6 % a year.
4. Orderinigcosts: ?1.0 per order.
5. Runout costs: ?1.2 per unit.
The first observation to be made after examining these graphs is that there is a
point of minimum costs in the fixed-limits method. This minimum is a function of
the safety factor k, so that any deviation from an optimal safety stock will cause an
increase in the total costs. Computations for the three safety factors k = 0,1,2 pro-
vide us with adequate results from which the point of minimum costs can be deter-
mninedor extrapolated, and this point may then be compared to the costs achieved
by the adaptive method.
In Figuire4(a), where the case of a stationary demand is illustrated, the two meth-
ods seem to exhibit a similar performance. The fixed-limit method yields slightly
lower costs, but the difference is too small to be significant. Figures 4(b) and 4(c),
where a trend and seasonal variations are included, show distinct advantages of the
adaptive method over the fixed-limits procedure. As expected, the adaptive method in
Ji~~~~~~~
t~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1
2 '-*4
-~~~~~~~~~~~~~~~~~~~
E-I
cli
3~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
B-3
ce,
cti
4X -59 -
B-539
B-540 SAMUEL EILON AND JOSEPH ELMALEIH
Pe rcenttge
Costs K saofty factor Costs Satisfied
1
14,0004~~~~~~~~~~0~~~~~~~
- /
14R
2 6~~~~~~=
1,000
_ _ _ _ _ _ _is__ _ _ _ _ _ _9
99-1/
9__ _ _ _ _ _ _
13,000 ' F RW 13,000 /

Cycle t;m.2 -=1 K -94
12,OOi K-0
6=0 >t
-12,000 _ 7_.
120 140 160 180 200 220 240 400 500 600 700
W _ g s , K=2 - ,100,.
t1000 - 17,.000
16,000 - /16,000
Cycle btme=4
15,000 =1 15,000 96/.
- --
t L^/, 93 %
14,000 /14,000
K 0 _ _ _ _ _ _ _
_ 94*/
._ F W R-_
60 t200 2,20 2'40 A20 2 r0 500 600 700 B00
8 %
41 ~~
~~~~~~~~~F
R
20,000 - 20,000
K=1 100 %
Cycle time= 6 18,000 10,000
A-10
R
KA
16,000
~~~~~~~~~~~~
16,000 W F
1220 240 2c0 290 30 320 340 600 700 800 900
Mean stocks Mean total of F,W and R
F= finished goods, W=work in progress, R=raw materials, X * adaptive, 0 * fixed
FIGURE 4(a). Tott,l costs against mean stock of finished goods, mean quantity of work in
progress, mean stock of raw materials and mean total of stock
(i) Costs tKsotety toctor Costs Percentoge
500 O F _= LF _
F 41 50 0oo Sotist
70ed
Bty__r;~~~~~~~~~~~~~K2
F R .
85%
WV
45,000 --45,000
Cycle time= 2
40,000 40,000
F R X_-___-_-__ 6_%
r 350 400 450 500 550 600 600 1100 1200 liO0 1400 1500 1600
2 89 %
55,000 - 9* F _%K= 6 55
F K="1""" 84'!
Cycle timenk 50,000 r R -50,000
45,000 -45,000
,._ _ _ _ _ _ _ _ _ _ _ Q W _ _ _ _ _ _ _ _ _ , 2 '!.-
,0g*I
450 500 550 600 650 700 750 1400 1500 166 1700 1800 1900 2000
41=2 05,000 0- 93
C%000
60 ,00o6 60,000 _ 83t
Cycle timQ=6
55.000 55,000
50,000 w F R
__ __ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ _ _ _
___-_-__ ___---_-__------__-___ -- 94','.
1 550 6C0 650 700 750 8o0 050 | 1600 1900 2000 2100 22G0 2300 2400 2500
mean stocks Mean total of F,W and R
F = finished goods, W =work in progress, R=raw materials, X - adaptive, 0 fixed.
FIGURE 4(b). Total costs against mean stock of finished goods, mean quantity of work in
(i) costs K=sotety factor Fosts Percentage

Sat isf ied
315,000 . 35,000
iR
---~~~~~~~~~~~~~
_t- 2 R -_ 86 *
Cyl V>30,000 _ K_L I- 0- 010
F 861.
Cycle t;me= 2 FK1 .01
2 5,0 00 F-W -R -25,0 00
m t xW O~~~~~~~~~~~~~~
- r . So--oN g
250 300 350 g00 900 1000 1100
W ~~~~~~~~~~~~~~~K-2 a 8A -.
35,000 /-_ 35,000
-0 a /.
Cycle timee 4 30,000 F -30,000
25 000 -2S,000
F R W
-A
I
A4
300 350
L
400 1 - I
900
-
I0&)
- L-
1100
,-j90*
1200
IV K=2 Oooo
4tpoc , 0 -
L/ _<.1 :1 -- - --e/
Cycle time=6 35,000 r3S0006-1
K
30,000 30,000
_ 3; 4 ~~X __ - -- - 9 3%*
300 400 5001U 12

Mean stocksWatoaofWanR
F= finished goods, W-work in progress, R=raw mnterrtals, X adaPtive, 0ftixed Mean total of F,w andR
FIGURE4(c). Total costs against mean stock of finished goods, mean quantity of work in
X - Adoptive limits
O0- Fixed limits K-O
Percentage Percentage Ol- Fixed limits K-o

Sisfed Satisfied 02-Fixed limits K:2
100 100
Finisht 50 90 1
-
GoodsX
80 $0
120 140 160 100 200 220 240 20 40 60 t0 100 120 140 160
100 100 0
Raw 1
Materials 90 - 90
80 80
120 140 160 180 200 220 240 20 40 60 t0 100 120 140 160
Maoons S'andard Oeviations
FIGURE 5(a). Percentage of demand satisfied against means and standard deviations (cycle
time 2) (data in Table 1)
both cases resultsin lower costs, but it is interestingto note that it also provides a
higherdegreeof demandsatisfaction.
The stock of work in progressis only slightly affected by the increase in safety
factor. This is Inot surprisingwhen we recall that the purposeof the safety factor k
is to raise the level of the bufferstock, and this is achievedby an occasionalincrease
in the level of productioil.
B-542 SAMUEL EILON AND JOSEPH ELMALEE
X- Adaptive limits
? Percentage
Satisfied
Percentage
Satisfied
0-Fixed
?
limits K-O
0- Fixed limits K:1
02-Fixed limits K(2
100 100
Finished
Goods 9? 90
80 80 x
400 500 600 F 50 300 400
100 100
Raw
90 90?
Materials
xX x
22
so0 80
COO 500 600 200 300 400

Means Standard Deviations
FIGURE 5(b). Percentage of demand satisfied against means and standard deviations (cycle
time - 2) (data in Table 2)
X - Adaptive limits
00- Fixed limits K- 0
Percentage Percentage -Fixed limits K_1

Satisfied Satisfied
02-F;xad limits K-2
'100 100 _
Finished
Goods 90 90 _
80 x 2 80x
r 20.0 300 C0O 100 200 300
100 100
Raw
900
900
Materials a a
x
200 300 400 100 200 300

FIGURE 5(c). Percentage of demand satisfied against means and standard deviations (cycle
time = 2) (data in Table 3)
Figures 5(a), 5(b) and 5(c) demonstrate the relationship between demand satisfac-
tion on the one hand and mean stock levels and their standard deviation on the other.
These results are given for the three cases (a), (b) and (c), when the cycle time is
T = 2. The relationship between the percentage of demand satisfaction and the mean
stock level should theoretically assume an asymptotic form reminiscent of the shape
of a cumulative gamma function. In a finite simulation experiment, however, it is
not difficult to achieve 100% demand satisfaction, provided the safety stocks are
high enough, and consequently the curves do not follow this asymptotic shape.
A comparison between the adaptive and the fixed limits methods in Figure 5 again
ADAI'TIVE LIMITS IN INVENTORY CONTROLi B-543
X- Adaptive limts
*0-FFxxd limits K :0
Percentage Parcaenacge *I-Fixed limits X: I

Sat isfied Sal,isled *2F,xed limits Kal
.ni3ihed 01 .X
Goods 90 0 0
60 609
______
so_ +Z60 200 220 240 2C0 260 300
-
20 40 60 80
1ev~~~~~~~~~~~~~~~~~~~
120 140 160
60
I100 - I100
Raw
Materials 90
80 80
ISO 000 622 240 260 260 300 l2 40 6x W0 100 120 140 160
Means Standard Deviotions
FIGURE 6(a). Percentage of demanfndsatisfied against meanrsand standard deviationis (cycle

tiune = 4) (data in Table 1)
X- Adaptlve I-mits
8o- Fixed limils KzO
<> Pel<lltege Pe,nrlvto 01- F.xed limits, Ka

b 5Isf ged Satisttd
*
-Fixed hnlls K 2
130 .00 1
FinishedJ X X
Goods 90
40~~~~~~~~~~~~~~~~6 /o2
Soo 600 200 30 4
100 100
R.1w X x
Materials 9 0 _ 90 _
6 0- 60
t 400 Soo
MIeons
i00 200
Stondard
300
Devi'atons
400
_
FIGURE6(b). Perceintage of demanidsatisfied against means and stanlard deviationis (cycle

timne= 4) (data in Table 2)
shows the advantages of the former, except for the case (a) of stationary demand,
where the adaptive limits converge to fixed limits and thereby achieve equal results.
Also, for a giveni meaanstock level the adaptive method achieves a higher degree of
dlemai(l satisfaction; alternatively, for a given level of demand satisfaction a lower
mean stock is require(l. However, we found that the standard deviation of stock
levels for the adaptive method wlas always higher than the one obtained by the fixed
limits method.
Figures 6 and 7 summarize simuilation results when the cycle times are 4 and 6
respectively and verify the coniclusionisderived from Figure 5.
B-544 SAMUEL EILON AND JOSEPIH ELNIAI2UH
X - Adaptive limits
4-Fixed limits K 0
O Percentage
Satisfied
Percentage
Satisfied ,-Fixed limits K:
. *2-Fixed limits K 2
100 100
Finished 90 X2 :
80 B O
300 .00 500 200 300 400
1 00 1 00
Materisa
80 c2 803
so - 1,,1, so1 -
300 400 500 200 300 400

FIGURE6(C). Percentage of demand satisfied against means and standhrd deviatiolis (cycle
X- Adaptive limits
00- Fixed limits K-0

Percentage Percentoge Q1- Fixed limits K- 1
Satisfied Satisfied
O2- Fixed limits 11:2
100 100 -
Finished 90 90
Goods
90 80
200 220 240 260 280 300 320 tOO 120 140 160 1I0 200 220 240
1 00 1Kt2
to2
Raw gO 90
Materials
80 90
200 220 240 260 280 300 320 r t0oo 120 140 160 190 200 220 240
FIGURE 7(a). Percerntageof demand satisfied against meanis and stanidard deviations (cycle
Figure 8 is an attempt to relate the mean stock level to its variance to check for
any possible exponential relationship. The graphs were plotted on logarithmic paper,
but no such relationship could be found. Again, one can see from these graphs that,
for a given mean stock level, tihevarianicein the case of the adaptive method is always
higher than that for the fixed limits.
An attempt was made to compare an adaptive s,S policy with an adaptive T',sa
policy and an example of the results is shown in Table 4. These results suggest t;hat a
more frequent periodical review of stocks, such as the one achieved by the T,sS
policy, tends to lower the average inventory, but this advantage iiust of course be
ADAPTIVE LlIMITS IN INVENTORY CONTROL B-545
X- Adaptive limits
0- Fixed limits K= O
Percenta-g Percentage Q- FiXed limits Ka I

$b45G ;Sf;,ed ~atisfied 0-Fxed limits K=2
100 IOCo
F;nished 2
Goods 9?
80 0 a80
v_ | A_____
_ FOOd .~~~1__.__
'>d0 dxOo 4dOt 500
soo 6000
GL
tOO t
100
| 2
Raw
-
_4 t.r_.X1 0 80- - I
. _1_t*I-__
__
__ t 60 o 70td tO0 T 40 503 600

FIuGRU. 7(b). Percenatageof demiandsatisfied againist means and standard deviations (cycle
time -= 6) ((lata in Table 2)
X- Adaptive limits
40- Fixed limits K=:
Percentage Percentage limits K -t

O Satistied Satistied
t1-Fiwed
0 2Fixed limits K:2
100 _ 100 _
Finished 90 _ x 2 vo0-2 X
80 80
300 400 500o 200 300 400

_ 1
K x
100 / 0 0 42
Ramw 90
Materials
80 so
-
[ 300 400 500 1V 200 300 400
veans Standard Deviations
FIGURE 7(c). Percentagc of demanidsatisfied agaitist means and standaird (leviations (cycle
time 6) (data in Table 3)
weighed against the increased costs of frequent reviews. A more detailed comparison
between VarliOuis invenitorycontrol policies is given elsewhere [1].
Conclusion
With tile exception of a hint by Lewis [2], who investigated inventory control
policies with the aid of ani analogue computer, and a recent paper by Trigg [6], who
suggested a method for adapting forecasting parameters, there appears to be little
mention in the literatuire of atdaptive policies for the control of inventories. Most of
Variance (i VGrGonce Va riance
1~~~~~~~~0
Cycle l;aT 2 Cycle t;me 4 Cycle time = 6
r? 1 ~~~~01
-6 0
0 52 W 2- W
R F -F
0V
062 - --_ 1 I
1
2-0h10
FX~~~~~~~~~~~~~~~~~
0 0
- F ------F~~~~~~~F
0 0 lO
O - K:O
1 - Ka 1
2 - K.2
X - Adaptive
_ - I- ''',I I- I I II1?h
I I I1 I I I I I
10C 0o 'lo?
Mean Ilean Mean
FIGURE 8(a). Variance against means (F = finishe(dgoods, W = work in] progress, R raw
materials)
-67-
Variaknce Variance Variance
Cycle time 2 Cycle time= 4 Cycle time 6 XR
x 2~~~~~~~~~~~~~
R- PF-- - - r
12~~ 2F-
t1~~ 6 F- 10
W -- -
Fo 2
1010 lo4
0 - Kx 0
I -CKat
2 -CKe-2
X- Adaptive
Mean Meon Mean
FIGURE 8(b). Variance against means (F = finished goods, W work in progress, R - raw
w
mnaterials)
B-546
ADAPTIVE LAIMITS IN INVENTTORY CONTItOL B-547
Vaocnce Q vrvr.'nce vor:onor
Cycir time :2 Cycle t e; 4 Cycle time 6
Ox
10
1;
_- 1US 10 ~~~~~~WX 2
Ox r X
VX~~~~~~~~~~~~~~~F
0~~~~~~~~~~~~~~~~
0 F~~~~~~~~ c
-F~~~~~~~~~~~~~~~ ~
0! i,4? J-bD -- -
2 K-0-
X -Adaphi 01
FIGURET8(C). Variance again.st means (F = finished goods, W = work in progress, R raw

materials)
TABLE 4
Comparisonof Adaptive s, S and T, s, S Policie8
S
9, T, s, S
Mean iniventory on hand 232 150

Starndarddeviation of inventory on hand 104 59
Pcrcentage of demand satisfied 98 96
Ordering costs 168 488
Itun-out costs 201 490
Total costs 7489 5767
Demand: Normal distribution-Mean 50; Standard deviation 5. Trend: None. Seasonality:

None. Lead time: Normal distribution-Mean: 6; Standard deviation 2. Cycle time: 2.
the discussion in papers on inventory control is devoted to models involving statioinary

demand distributions and mutchof the analysis centres on a "once and for all" de-
termination of fixed control parameters based on historical data. This is only a natural
development of inventory theory and understandable in the light of the cost and
availability of computers in ilhe past. Now that computers are beingnused more ex-
tenisively in iiidustry, there is less justification to confine such investigations to sta-
tionary models and adaptive control procedures in real time terms can be developed,
even "on line" where appropriate.
The studies reported in this paper clearly demonstrate the advantages to be gained
from using adaptive control limits (wNhichaie periodically adjuste(dto take account 6f
recent information) in cases where the demand is subject to seasonal variations and/or
to trends. While the studies were mainly concerned with a T,s,S inventory policy,
the same procedure for determining adaptive cointrol limits can be employed to ex-
plore and compare the performance of other policies for conitrolling inventory and
for controlling production-iinventory systems. One such comparison reported in this
paper iiidicates the advantage of the T,s,S policy compared with an s,S policy.
Appendix 1
Winters forecasting rule [5]:
If we denote expected demand by y, actual demand by x time by t and a smoothing
factor by a, the formula for forecasting by simple exponential smoothing is
(1) yt = ax, + (1 - a)yt1i .
If the observations include seasonal variations, the above formula will liold only if
the quantity in the observation, due to seasoiiality is removed. Tlherefore, taking ft as
seasonal factor and L as the length of the season anid usinig an asterisk for denlotilig
seasonal data, then
(2) y t = t*lft = axe*/ft-L + (1 - a)yt--i
And to convert the, deseasonalized forecast to one which takes account of the seasons:
(3) yt* = y t*ft-L+1
The seasonal factors are computed using the formula:
(4) ft = Xt3x/y t + (1 - )fft-L
where : is a smoothing constant.
If the data contains a linear trend T, the formula then takes a more complex form
(5) Yt = fxtf*/ftL + (1 - a)(yt-1 + Tt-1).
For calcuilating the trend at every step:
(6) Tt= -(yt- y) + (1 -y)Tt
where y is a smoothing constant.
To convert the unexpected demand figure from its value without trend or seasolnal
variations into its actual value
Yt(with trend) = (yt + TAt)ft_ L
References
1. EILON, S. AND ELMALEH, J., "An Evaluation of Alternative IInvenltory Conltrol Policies,"
International Journal of Production Research, Vol. 7, No. 1 (1968), pp. 3-14.
2. LEWIS,C. D., "Generating a Continuous Trend Corrected, Exponentially Weighted Average
on an Analogue Computer," OperationalResearchQuarterly,Vol. 17 (1966), p. 77.
3. VEINOTT, JR., A. F. AND WAGNER, H. M., "Computing Optimal (s, S) Iniveiitory Policies,"
ManagementScience, Vol. 11, No. 5 (March 1965), p. 525.
4. WAGNER, H. M., O'HAGAN, M. AND LUNDH, B. "An Empirical Study of Exactly and Ap-
proximately Optimal Inventory Policies," Management Science, Vol. 11, No. 7 (May
1965), p. 690.
5. WINTERS, P. R., "Forecasting Sales by Exponentially Weighted Moving Averages," IJan-
agementScience, Vol. 6, No. 3 (April 1960), p. 324.
6. TRImG, D. W. AND LEACH, A. G., "Exponential smoothing with an anlaptive response rate,"
OperationalResearchQuarterly,Vol. 18 (1967), p. 1.

Adaptive Limits in Inventory Control

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Adaptive Limits in Inventory Control

Author(s): Samuel Eilon and Joseph Elmaleh

ADAPTIVE LIMITS IN INVENTORY CONTROL*

Cycle time = 2 Cycle time = 4 Cycle time = 6

Cycle time - 2 Cycle time = 4 Cycle time - 6

Cycle time = 2 Cycle time = 4 Cycle time = 6

13,000 ' F RW 13,000 /

15,000 =1 15,000 96/.

Cycle time= 6 18,000 10,000

(i) Costs tKsotety toctor Costs Percentoge

Cycle timenk 50,000 r R -50,000

60 ,00o6 60,000 _ 83t

(i) costs K=sotety factor Fosts Percentage

2 5,0 00 F-W -R -25,0 00

300 400 5001U 12

Percentage Percentage Ol- Fixed limits K-o

0- Fixed limits K:1

02-Fixed limits K(2

400 500 600 F 50 300 400

COO 500 600 200 300 400

00- Fixed limits K- 0

Percentage Percentage -Fixed limits K_1

r 20.0 300 C0O 100 200 300

200 300 400 100 200 300

Percentage Parcaenacge *I-Fixed limits X: I

FIGURE 6(a). Percentage of demanfndsatisfied against meanrsand standard deviationis (cycle

8o- Fixed limils KzO

<> Pel<lltege Pe,nrlvto 01- F.xed limits, Ka

Soo 600 200 30 4

FIGURE6(b). Perceintage of demanidsatisfied against means and stanlard deviationis (cycle

300 .00 500 200 300 400

300 400 500 200 300 400

00- Fixed limits K-0

Percenta-g Percentage Q- FiXed limits Ka I

__ t 60 o 70td tO0 T 40 503 600

40- Fixed limits K=:

Percentage Percentage limits K -t

0 2Fixed limits K:2

300 400 500o 200 300 400

Variaknce Variance Variance

Cycle time 2 Cycle time= 4 Cycle time 6 XR

Mean Meon Mean

Vaocnce Q vrvr.'nce vor:onor

Cycir time :2 Cycle t e; 4 Cycle time 6

FIGURET8(C). Variance again.st means (F = finished goods, W = work in progress, R raw

Mean iniventory on hand 232 150

Demand: Normal distribution-Mean 50; Standard deviation 5. Trend: None. Seasonality:

the discussion in papers on inventory control is devoted to models involving statioinary

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