Inventory Models for Deteriorating Items

Inventory Models for Deteriorating Items

Vinod Kumar Mishra (B.T. Kumaon Institute of Technology, India)
Copyright: © 2014 |Pages: 10
DOI: 10.4018/978-1-4666-5202-6.ch113

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The focus of the Operations Research is on applications of mathematics and logic in research and decision-making on operations, as well as problem solving in all types of public and private organization business, industry, government and state enterprises in order to bring about optimal outcomes in organizational operations. A common misconception held by many is that O.R. is a collection of mathematical tools. While it is true that it uses a variety of mathematical techniques, operations research has a much broader scope. It is in fact a systematic approach to solving problems, which uses one or more analytical tools in the process of analysis. However, O.R. does not preclude the use of human judgment or non-quantifiable reasoning; rather, the latter are viewed as being complementary to the analytical approach. One should thus view O.R. not as an absolute decision making process, but as an aid to making good decisions. O.R. plays an advisory role by presenting a manager or a decision-maker with a set of sound, scientifically derived alternatives. However, the final decision is always left to the human being who has knowledge that cannot be exactly quantified, and who can temper the results of the analysis to arrive at a sensible decision. In this chapter we discuss inventory system with special focus on deteriorating inventory items which is one of the main streams of the operations research.

Inventory is simply a stock of physical assets having some economic value, which can be either in the form of material, money or labour. Inventory is also known as an idle resource as long as it is not utilized. Inventory, may be regarded as those goods which are procured, stored and used for day to day functioning of the organization. This can be in the form of physical resource such as raw materials, semi finished goods used in the production process, finished products ready for delivery to consumers, human resources such as unutilized labour, or financial resource such as working capital etc. Inventories are materials stored, waiting for processing, or experiencing processing.

Inventory Management and Inventory Control must be designed to meet the dictates of the marketplace and support the company's strategic plan. The many changes in market demand, new opportunities due to worldwide marketing, global sourcing of materials, and new manufacturing technology, means many companies need to change their Inventory Management approach and change the process for Inventory Control. The Inventory Management system and the Inventory Control Process provides information to efficiently manage the flow of materials, effectively utilize people and equipment, coordinate internal activities, and communicate with customers.

Deterioration is defined as decay, damage, dryness and spoilage. It is that process in which an item losses its utility and become useless. Inventory in deteriorating items is a general phenomenon in daily life. Many items like fruit, vegetables, milk, fashion goods, electronic components, medicines, alcohol and gasoline etc. are called deteriorating items. So decay or deterioration of physical goods in stock is a very realistic factor and there is a big need to consider this in inventory modeling when items are deteriorating. Deterioration rate can be a constant fraction of the on hand inventory or it could be changing (increasing or decreasing) according to some function. The underlying deterioration distribution affects the nature of the deterioration rate. There are six steps for development of instantaneous and non instantaneous deteriorating inventory models. These can be listed as follows

  • Define the problem and gather relevant data.

  • Formulate a mathematical model to represent the problem.

  • Develop a procedure for driving solutions to the problem.

  • Test the model and refine it as needed.

  • Prepare for the application of the model.

  • Implementation.

Key Terms in this Chapter

Partial Backlogging: In most practical situations there is a combination of above extreme i.e. customers search for new supplier and some may wait for the consignment. Hence there is lost of sales but it is only partial loss.

Holding Cost: (Also called carrying cost) The cost associated with the storage of an inventory until its use and sale. This cost include rent for space used for storage, insurance of stored items, production taxes, depreciation of equipment and furniture etc.

Item Cost: Item cost is the cost charged by the suppliers for one unit of item, or the total cost to the organization of acquiring one unit.

Shortages and Backorders: The request for material from inventory which can not be met on demand is known as shortage. We can treat these shortages in one of the two ways. First; we can record the unsatisfied demands, as backorders, separately from normal demand and deliver requested material to the customer where the shipment arrives from the supplier. Alternatively, we can fail to record unsatisfied demands and force the customer to go elsewhere for the material or to make a new request for material either on a specified date or when he expect additional material will have come into stock. These treatments are often called the fill or kill method. Sometimes the method of handling unsatisfied demands will be determined by the customer.

Lead Time: Lead time, is the average length of time elapsing between the date an inventory reaches its reorder point and the date additional material ordered as a result of the inventory having reached its order point, is delivered to the warehouse as ready for issue.

Complete Backordering: Any demand, when out of stock, is backordered and filled as soon as an adequate sized replenishment arrives. This situation corresponds to captive market common in government organizations and the wholesale- retail link of some distributed system.

Shortage Cost: Shortage cost is the cost of having a shortage and not being able to meet demand from stock. Shortages of stocks may result in the cancelation of orders and heavy losses in sale which in turn may result in loss in goodwill, profit even the business itself.

Ordering Cost: This is the cost associated with the ordering of raw material for production of the items. Advertisement, consumptions of stationary and postage, telephone charges, travelling expenditure etc constitute the ordering cost. Ordering cost is simply the total of expenses incurred in placing an order.

Demand Rate: The demand rate is defined as the number of units, worth of an item requested by a customer in a unit time period. If Q is the demand size over a period T then demand rate (R) = Q / T.

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