International Journal of Systems Science Vol. 36, No.

1, 15 January 2005, 3947

Warehouse sizing and inventory scheduling for multiple stock-keeping products

V. V. PETINIS{, C. D. TARANTILIS{* and C. T. KIRANOUDIS{
{Department of Process Analysis and Plant Design, School of Chemical Engineering, National Technical University of Athens, 15780 Athens, Greece {Department of Management Science & Technology, Athens University of Economics and Business, 11362 Athens, Greece (Received 14 July 2003; revised 31 August 2004; accepted 13 October 2004) In this paper, a commercial problem of enterprise logistics nature called multi-product warehouse sizing problem is formulated and solved. The optimal warehouse inventory level and the order points are determined by minimizing the total inventory ordering and holding costs for a specic time period. The problem is formulated as an appropriate mathematical model of NLP nature and solved using appropriate numerical optimization techniques (successive quadratic programming procedures). The entire mathematical background for formulating the problem and nding the optimal solution to it is presented and appropriately addressed. The model is also illustrated with the help of a numerical case study where the sensitivity of the model parameters involved is given through appropriate gures.

1. Introduction One of the most important issues towards a successful company operation is the proper management of its inventories, the determination of the appropriate ordering policy and dispatching of its products. The models developed for the management of the inventory generally aim to optimize order scheduling and distribution of the companys products. The essential target is the minimization of the total cost which generally includes the operating cost, the purchase cost, the carrying cost, the holding cost, and the cost of inventory shortage. The inventories of a company, which usually represent the major part of its assets, give exibility to a company to organize commercial and production activities and full the demands of its customers. Shortage of inventories may stop the production process or order fulllment. In both cases, the eects are very unfavourable towards its economic eciency. However, keeping great amounts of products stored can lead to heavy nancial obligations, which decrease the nancial uidity of the company. This means that

*Corresponding author. Email: tarantil@ aueb.gr

the choice of an inventory-management policy should balance the two extremes of inventory holding. From a marketing and production point of view, the aim is to store large quantities of products in order to be able to full the market demand at any time. However, from the nancial point of view, the aim is to store the minimum inventories. The main target of every company is to full the demand of its customers at a minimum cost. The real-life situation that our problem describes is illustrated in gure 1. According to gure 1, a number of products, denoted N, is ordered while the ordering cost for each time i i is equal to Corder . The products are stored in the warehouse before being distributed to the market. The time that intervenes between two successive orders, which is equal to the maximum time that product i remains in the warehouse, is called the cycle time for product i. The cost of storage and handling of each item i is i Cholding . The rate at which product i is distributed on the market is equal to its demand rate di. In our problem, we have developed a mathematical model to describe the above procedure. More specically, the mathematical model was developed for controlling the inventory and organizing the ordering procedure. Our objective is to meet

International Journal of Systems Science ISSN 00207721 print/ISSN 14645319 online 2005 Taylor & Francis Ltd http://www.tandf.co.uk/journals DOI: 10.1080/0020772042000320795

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V. V. Petinis et al. of an ordering schedule. In addition, another model that refers to the initial inventories is developed by Segerstedt (1999). The paper addresses the problem of the optimal order sizes that a machine should produce in a capacity constrained facility. The initial inventories are essential in deciding the order in which the production should be performed to avoid shortages. Again, the basic dierence from our model is the absence of a machine, whereas products are ordered from retailers and stored in the warehouse. The problem of inventory control and warehouse sizing has been developed by Goh et al. (2001). They use the Lagrange multiplier method to solve the multiSKUs storage problem with separate inventory stocks. The topics of warehouse sizing and inventory control have also been examined by Gutierrez et al. (2002). A dynamic lot size problem has been described, which nds the optimal production and order plan to satisfy the demands over a given number of periods at minimum cost. The dierence is that it uses restrictions in the lot sizes by using bounds and considering storage capacity.

Figure 1.

Real-life problem.

the demand for each product that would correspond with the minimum total cost for the company. Orders are of equal size and placed at regular intervals over time. The aim is to determine an ordering policy that will allow the company to best account for the trade-o between cost of ordering the product and cost of holding inventory over an innite period of time. Our mathematical model is essentially an accounting formula that determines the point at which the combination of order cost and inventory carrying cost is as low as possible. For these reasons, the mathematical model aims to determine the optimal cycle times for every itemwhich are those that contribute less to the total costand use them to calculate the quantity of every order and the order points. The result of this procedure will be the most cost-eective quantity to order. It also nds the optimal inventory level for each item and for the total quantity of the items. One important parameter that is used in our study is the fact that before the rst order is made, there might be an initial inventory level for some of the items. The mathematical model determines the time when the rst order should be made.

3. Mathematical model formulation and analysis In this section of the paper, all steps that adopted in formulating the mathematical model will be described analytically. We will also present the assumptions on which study is based, the analytical equations that comprise the mathematical model using some gures which are necessary to describe the problem and the model, the computational results with the illustration of the optimal solution, and nally some analytical equations that have arisen from the analysis of the model. 3.1 Assumptions The mathematical model is developed, based on the following assumptions: (1) An initial inventory level is considered for a number of different products. (2) The demand rate of every product is known and constant. (3) A planning horizon is considered for the study. (4) At the end of the time horizon, the inventory level of the warehouse is considered to be zero, which means that the warehouse should be empty. (5) No constraints on lot size. Specically, what we need to take into consideration to solve a given problem is the number of the dierent items that are going to be stored in the warehouse. The product is ecient for any number of N dierent items, but in our study, for the sake of clarity, we

2. Literature review There have been many inventory models for calculating the optimal order quantities and reorder points. Lot sizing and scheduling is a common problem that concerns many companies. There are, for example, stochastic models to determine order quantities, techniques for forecasting demand, and dierent kinds of ABC analysis. The Economic Order Quantity is one basic model. Our mathematical model deals with the problem of inventory control and scheduling. One essential dierence from the EOQ model is that, in our problem, we have used one more design variable. We have considered an initial inventory level for a number of items and a dierent denition of the total cost equation. This gives us the opportunity to know the optimal time in which the rst order should be made. This is an important feature that highlights our study and dierentiates it from many inventory-scheduling problems. The problem of initial inventories has been developed by Kimms (1996), where a mixed integer program is presented to nd the dynamic lot sizing in a multilevel single machine environment. The basic dierence from our work is the absence of production but the use

Warehouse sizing and inventory scheduling have decided to illustrate in gures the case of two items. We also consider that our study takes place at a xed time horizon. For example, the time horizon of our study could be a 1-year period. It is also important to say that the demand rate of every item should be known a priori and is considered to be constant during the time space that the project will be formulated. We also include a sensitivity analysis to cover the possibility of a change in demand and the implications of this change on the warehouse volume and the total cost. One more important assumption made for the formulation of the mathematical model is the consideration that at the end of the time horizon the warehouse should be empty. Inventory scheduling is designed in such a way as to ensure that there will be no items left in the warehouse after the expiration of the time horizon.

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In general, we consider a number of N dierent items so the above parameters should be replaced by those that refer to the item i, that is to say Ii, Hi, x, to , ti, di. i What we consider known in our problem are the number of dierent items (N), the demand rate of every item (di), the nite time horizon in which the study for the inventory and the warehouse size takes place (T), and the two elements of total cost, which are the holding cost per currency unit per unit time and the ordering cost for each item in currency units per order. Figure 3 shows the total inventory-level variation for two items. As we can see, the total inventory level in the case of more than one item is obtained by the sum of the inventory level of the items at any time. As a consequence, the total inventory level in the case of N items is given in terms of the following equation:
N X

Ii

N X i1 N X i1

Hi di t0i & Hi d i t to i t to i xi xi !' : 3

3.2 Mathematical model analysis The inventory level for a single item is illustrated in gure 2. The inventory-progress parameters are as follows: H: quantity of order; x: cycle time; t: time space; to: time at the initial inventory level, before the rst order is made; t: time at the present inventory level; d: inventory depletion (demand rate). According to the above denition for the time at the present inventory level, t0 can be given by the following equation:  ht t i o t0 t to x , x 1

i1

where [] represent the integer part of a number . Obviously, the inventory level for the item is given as follows: I H d t0 : 2

According to the mathematical model that we have formulated, in the rst step we consider a value for the cycle time of every item, and we nd the time points where an order is made. Then, for all these points, the inventory level for every item is calculated. The sum of the inventory levels of each item gives the total inventory level for the N items. Our objective at this point of the formulation of the mathematical model is to nd the point where the maximum inventory level is observed for every set of cycle times. The maximum level of the inventory level is obviously a point where an order is made, and for this reason, we nd the total inventory level only at these time points. For every j 1, 2, . . . , N, the time space is equal to: t to kj xj , j where kj is the number of orders for j items. 4

Figure 2.

Inventory-level progress.

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V. V. Petinis et al.

Figure 3.

Total inventory level for two items.

If we take into consideration a time horizon equal to T, then the time when the rst order is made can be given directly from (5), while the number of orders is kj 0, 1, 2, . . . , to T xi i According to (4) and (5),
N X i1 N X& i1

3.3 Total cost equation Apart from maximization of the inventory level, another parameter aecting our problem is cost. In our study, we have considered the total cost as the sum of the ordering and holding cost. Assuming a linear equation for cost, total cost can be given from the following relation:
N X i ciw Ii cio Norders , i1

T xi

! T 1 xj !

Ctot

Ii

Hi di to kj xj to xi j i

&

!'' to kj xj to j i xi & ! N & X T di xi di T xj kj xj xj i1 to i T xj T=x kj xj to i xi xi

!'' :

In order to nd the value of the maximum inventory level, we use an objective function named OBJ. So, the next equation gives the value we are seeking: OBJ
N

X k, k1, 2,...,N

max
j1

N X& i1

& ! T di xi di T xj xj to i !''! :

where for i 1, 2, . . . , N: Ctot is the total cost; Ii is the inventory level of item i; i Norders is the number of orders for the item i; ciw is the holding cost for item i; and cio is the ordering cost for item i. In the next step of the mathematical model formulation, the total cost equation is used to calculate the total cost at the points where the maximum inventory level for the dierent sets of cycle times has been evaluated. The minimization of the total cost equation gives the optimal set of cycle times. All previous equations represent the central core of the mathematical model. In addition, we have used subroutines to nd the optimal solution which results from the minimization of the total cost equation. A sequential quadratic programming (SQP) method is used to minimize a smooth non-linear function subject to a set of constraints on the variables.

kj xj to xi i T xj T=x kj xj xi

3.4 Computational results In gure 4, which is a contour line map, the case of two products and specically the total cost in terms of the cycle times of these two products is illustrated. The variation of the total cost in the case of two products

Warehouse sizing and inventory scheduling

43

Figure 4.

Total cost variation in the case of two items.

Figure 5.

Total-cost variation in the case of two items.

can also be illustrated in the rendered 3D surface in graph gure 5 and the shaded relief map in gure 6. Figures 5 and 6 show that while the total cost decreases, its minimum is close to the nodes of xi equal to 50, 33.3, 25, 20 . . . , which means that the optimal set is the one water xi equals half, a third, or a quarter of the time horizon (the time horizon is equal to 100). The optimal set is not exactly observed at the nodes of the xi T/ki, where ki 0, 1, 2, . . . because we have considered the initial time in our

problem. Only when the cycle times of each item have equal values are the minimum values of the total cost observed at the nodes of xi T/ki. 3.5 Analytical equations Depending on the formulation of the mathematical model, some analytical equations for the parameters of the problem arise. The mathematical model gives the optimal set of xi for every item, which is observed

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V. V. Petinis et al. The following equation gives the minimum total cost value:
min Ctot 2 N X q di T tio cio ciw : i1

12

At the point where the minimum total cost is evaluated, the value of the total-order cost is equal to the value of the total inventory holding cost. This explains the appearance of number 2 in (9). The number of orders for the item i can also be obtained from the following equation: s i Cw ki T tio di : i Co

13

Figure 6.

Total-cost variation in the case of two items.

at the point of minimum total cost. If we know these values beforehand, we can evaluate all the other parameters of our problem. The inventory level with the minimum total cost can be given in the following equation: Imax jCtot min
N X i1

4. Numerical example As an illustration, the case of N 50 is discussed using a numerical example. The related data are demonstrated in table 1. We describe the case of 50 items with a known demand rate and holding and ordering costs. In addition, the time horizon has been determined at 1 year. The solution of the example is shown in tables 2 and 3. As mentioned before, the mathematical model gives the optimal set of cycle times and the value of the total cost. All other problem outputs can be given from (8)(13). For all the items, we have found the optimal cycle time, which is the time that has to pass before a new order is made. We have also calculated the initial time unit if we consider that we have initial inventories for every item (i.e. the time before the rst order is made), the number of orders, and the contribution of each item to the total cost and to the total inventory level.

di xi :

This is the optimal total inventory value and is used to evaluate the warehouse that we need to store the products. If we know the number of the items stored in the warehouse, we can evaluate the needed warehouse space, provided we know the volume that each item needs to be stored. The maximum inventory level of item i is equal to
i Imax di xi :

(9) gives the contribution of item I to the total inventory level in product item units. Another parameter that is calculated from the mathematical model is the number of orders for each item. Specically, the optimal number of orders for the item i can be given from the following equation: ki T : xi ! 10

5. Sensitivity analysis In this section, we study the eect of various parameters of our problem on the optimal solution and, specically, their eect on the total cost and the optimal inventory level. Specically, according to (9), the maximum inventory level at the point of minimum total cost is aected by the demand of each item and the cycle times, which are of course aected by the inputs of the problem. Moreover, according to (12), the parameters that can aect our optimal solution, and especially total cost, are the demand and the two elements of total cost, holding and ordering-cost components.

The initial time space can be given as follows: tio T xi ki , 11

where ki has been previously calculated from one of the above equations.

Warehouse sizing and inventory scheduling

Table 1. Item 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 Data for two items. Cholding ($/t prod) 200 300 400 200 500 600 700 100 500 600 520 560 600 480 400 320 330 250 290 360 390 410 450 480 500 520 560 580 300 200 400 600 400 580 400 600 400 600 450 530 600 600 510 620 400 350 450 650 480 600 Corder ($/order) 800 1000 900 400 500 1000 1500 900 1500 1300 700 800 850 1100 1200 1500 1000 900 980 870 560 890 580 690 850 950 1400 1100 1050 970 1000 1500 1200 1100 950 860 800 1000 900 950 1200 1200 980 810 890 780 890 960 910 1100 Item 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 Table 2. xi (years) 0.199296 0.088622 0.083669 0.113653 0.068314 0.079744 0.082402 0.185518 0.080533 0.065667 0.091789 0.081832 0.077109 0.092679 0.084245 0.099393 0.083368 0.087006 0.084071 0.071082 0.050349 0.063281 0.094437 0.062854 0.067024 0.057514 0.064444 0.111111 0.182444 0.107166 0.070259 0.071096 0.077888 0.067305 0.079606 0.067805 0.087619 0.059857 0.08113 0.064709 0.06225 0.082185 0.082099 0.061742 0.077435 0.06261 0.058287 0.054733 0.064169 0.082888 Solution for 50 products. ki 5 11 11 8 14 12 12 5 12 15 10 12 12 10 11 10 11 11 11 14 19 15 10 15 14 17 15 9 5 9 14 14 12 14 12 14 11 16 12 15 16 12 12 16 12 15 17 18 15 12 to (years) 0.003519 0.02516 0.079636 0.09078 0.043597 0.043077 0.011175 0.07241 0.033609 0.015001 0.082114 0.018014 0.074688 0.073211 0.0733 0.006073 0.082952 0.042939 0.075221 0.004855 0.043366 0.050782 0.055626 0.057184 0.06167 0.022263 0.033333 0.00001 0.087781 0.035502 0.016379 0.004656 0.065347 0.057732 0.044724 0.050733 0.03619 0.042286 0.026444 0.029368 0.003996 0.013782 0.01481 0.012131 0.070785 0.060856 0.00912 0.014799 0.037466 0.005338

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d (t prod./year) 100 400 300 150 200 250 300 250 450 500 150 200 220 250 400 450 400 450 450 480 550 520 140 350 360 550 570 150 100 410 500 480 470 400 350 300 250 450 290 420 490 280 270 340 360 540 570 480 440 260

Inventory level (t prod) 19.92962 35.44871 25.10084 17.04788 13.6629 19.93589 24.72062 46.37948 36.23966 32.83331 13.76828 16.36644 16.96404 23.16972 33.69817 44.72673 33.34718 39.1525 37.83188 34.11927 27.69203 32.90624 13.22124 21.99905 24.12848 31.63268 36.73335 16.66667 18.24438 43.93824 35.12932 34.12607 36.60723 26.92193 27.86222 20.34143 21.90477 26.9357 23.5276 27.17768 30.50263 23.01175 22.16677 20.99223 27.87646 33.80919 33.22361 26.27203 28.23433 21.55101

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V. V. Petinis et al. readjust its policy. This case for the percentage increase of demand and ordering cost has been studied. The next gure illustrates the variation of the total cost after the increase of the demand rate and of the order cost of 50 products. It should be mentioned that the gures are based on the results of the previous numerical example, as this describes the case of 50 products using the data from table 1. Figure 7 illustrates the variation of the warehouse volume after the increase in demand and the order cost in the case of 50 products. Note that the demand rate is a more important factor than the order cost and aects the total cost more. For example, a 30% increase in the demand rate and in the order cost leads to a 15% and 13% increase in total cost, respectively.

The eects of the demand and the holding cost of each item to the optimal solution are the same, as they are both involved in the same part of the total cost equation (they comprise the total holding cost). There are some situations where demand or ordering cost change. Our initial data or our estimations for the value of some parameters might be dierent from the real situation. It is a fact that in many cases, the suppliers of the products make discounts when the ordering quantity is high. This means that the company has to
Table 3. Ctot ($) 1 213 912 Solution for fty products. Total inventory level (t prod) 1380

Figure 7.

Total-cost variation.

Figure 8.

Warehouse-volume variation.

Warehouse sizing and inventory scheduling One critical remark that derives from the above gure is the fact that there is a linear variation of the total cost as a factor of the percentage increase in demand and ordering cost. An increase in the order cost leads to the decrease in the number of orders and the increase in the cycle times. However an increase in the cycle time leads to an increase in inventory level. According to the fact that demand rate is a more important factor than the order cost, the total cost increase is the result of the order cost increase. The increase in demand rate leads to an increase in the inventory level to satisfy the higher levels of demand. This leads to an increase in the value of the total cost, as the number of orders should be higher as the holding cost rises too. As a result, we need to obtain more storage space to store the higher inventory levels. We can also observe that there is a linear increase in the total inventory level as a factor of the percentage increase in demand and ordering cost. 6. Conclusions In this study, a mathematical model for inventory programming and warehouse sizing is developed for multiple stock-keeping products. Our goal was to determine a mathematical model that was ecient in solving the inventory and order-planning problem. We proposed a mathematical model with the objective of minimizing the expected total cost (consisting of inventory holding cost and ordering cost). In this paper, we have considered a new parameter in the inventory-scheduling problem, which is the initial time space and the initial inventory level. This multi-product warehouse model can be applied to many practical situations and has a broad area of applicability. To gain an insight, we solved a numerical example to present the utility of the mathematical model in inventory planning and warehouse sizing. The sensitivity analysis yielded important results and showed how some factors aect the optimal solution. For instance, it has been shown through the sensitivity analysis that in the case of order-cost increase, the optimal solution approaches higher levels of inventory and warehouse volume, as the number of orders should decrease. In addition, an increase in the demand leads to a linear increase in the total cost. Further extensions can be made for

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non-constant demands, non-linear total-cost equations or deteriorating items. We will consider these extensive problems in future research, as they are worth studying.

Acknowledgements The author greatly appreciates the anonymous referees for their very valuable and helpful suggestions on an earlier version of this paper.

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