Amit Kumar et al Int. Journal of Engineering Research and Applications www.ijera.
com
ISSN : 2248-9622, Vol. 4, Issue 2( Version 1), February 2014, pp.468-473
RESEARCH ARTICLE OPEN ACCESS
Optimization of Inventory System: A Case Study of Haldiram
Bread Industry
Amit Kumar1, Mahima Singh2 and Bimal Kumar Shrivastava3
Department of Mechanical Engineering Rajeev Gandhi Proudyogiki Mahavidhyalaya, Bhopal, India
ABSTRACT
Supply chain generally involves the transformation of products from supplier to manufacturer and from
distributors to retailers & finally to customers. But by using the lateral transshipment the products from one
location to another location in a same stage i.e. from retailers to retailers at emergency condition can be sent.
This can optimize the inventory carrying at warehouse and transferred unit from warehouse to retailers and
minimize the back order and inventory level at the retailers. Thus total supply chain cost can be minimized. In
the present work single-echelon two stage optimization models is employed for inventory distribution from
warehouse to three retailers in first stage. Optimal transshipment of product among three retailers due to
interactive-lateral transshipment is identified in second stage. Model is validated by case study of Haldiram
bread industry.
KEYWORDS: lateral transshipment, inventory, Supply chain
I. INTRODUCTION
Supply chain management is a set of
approaches utilized to efficiently integrate suppliers,
manufacturers, warehouses, and stores, so that
merchandise is produced and distributed at the right
quantities, to the right locations, and at the right time,
in order to minimize system wide costs while
satisfying service level requirements.
II. INVENTORY MANAGEMENT
The scope of inventory management also
concerns the fine lines between replenishment lead-
time, carrying costs of inventory, asset management,
inventory forecasting, inventory valuation, inventory
visibility, future inventory price forecasting, physical Fig. 1. Echelon System
inventory, available physical space for inventory,
quality management, replenishment, returns and Lateral transshipment is defined as a retailer
defective goods and demand forecasting. use which provides stocked items to another retailer
which is out of stock or to prevent out-of-stock
III. ECHELON SYSTEM occurrences
Echelon system mainly two type’s single–
echelon and multi–echelon inventory optimization .A
sequential single-echelon approach forecasts demand
and determines required inventory for each echelon
separately. Multi-echelon inventory optimization
determines the correct levels of inventory across the
network based on demand variability at the various
nodes and the performance
Fig.2. Lateral Transshipment in Inventory System.
www.ijera.com 468 | P a g e
Amit Kumar et al Int. Journal of Engineering Research and Applications www.ijera.com
ISSN : 2248-9622, Vol. 4, Issue 2( Version 1), February 2014, pp.468-473
IV. INVENTORY CARRYING COST inventory and backorder costs will determine whether
In almost any business analysis involving a company should over- or under-produce. Back
inventory, physical inventory levels must be order cost is equal to profit per unit, as Rs.2.50 at
converted to inventory costs. The more inventories every retailer.
you have, the higher your exposure to this sort of
loss. Quality Cost - High levels of inventory usually VIII. LINEAR PROGRAMMING
increase the chance of product damage and creates MODEL
lower feed-back loops between supply chains Linear programming (LP or linear
partners. optimization) is a mathematical method for
determining a way to achieve the best outcome (such
V. UNIT INVENTORY CARRYING as maximum profit or lowest cost) in a
COST AT WAREHOUSE given mathematical model for some list of
Unit inventory carrying cost at warehouse = requirements represented as linear relationships.
Unit paper box cost + Unit labor cost + Unit
electricity charges. IX. MODEL DESCRIPTION
One paper box = Rs.3.25 Generalized model is a single-echelon two
Capacity of box = 40 unit stage distribution inventory model with Nw
One unit cost = Rs.3.25/40=Rs.0.08125 warehouses and Nr retailers with limited capacities. In
One labor charge per day = Rs.300 this model considered more number of warehouses
One labor put 2000 unit per day or carry unit and all warehouses products transfer to all retailers.
One unit=300/2000 =Rs.0.15 In this warehouses have a limited capacity for carry
Cooling charges, electricity charges Rs.18 for 24 products. All retailers have limited number of
hours or one day product to carry. Model is optimizing for total supply
Warehouse capacity =1200 unit chain cost. [8]
Rs.18 for 1200 units,one unit=Rs.18/1200=Rs.0.015
Unit inventory carrying cost at warehouse = X. TWO STAGE CONSTRAINED
0.15+0.015+0.08125= Rs.0.24625 OPTIMIZATION MODEL
The generalized model deals with
Similarly Inventory Carrying Cost at Retailers are optimizing the inventory levels of the supply Chain
0.185/unit, 0.37/unit, 0.4625/unit respectively. entities with consideration of single-echelon
warehouse to retailers and among retailers. The
VI. INVENTORY TRANSPORTATION diagrammatic representation of the proposed model
COST for the period p is shown in Figure 3.1.
A critical issue in the management of T Cp = Minimize TCp1 +Minimize TCp2
physical distribution activities is whether the
organization should own transport facilities or hire TWO STAGES PROPOSED MODE
them.
Unit Transportation cost from warehouse to
retailers with the average of truck is 10 km. / liter and
capacity 500 unit. Unit cost from warehouse to 1st ,
2nd & 3rd retailers are Rs.0.07456, Rs.0.082016 &
Rs.0.096928.
Unit transportation cost from retailer to retailer:
Assuming Two wheelers average 50km. / liter and
Petrol cost Rs.74.56.
First retailer to second retailer unit transportation cost Figure3.1 Two stage constrained optimization model
=0.5 km.*Rs.1.4912=Rs.0.7456/unit.
First retailer to third retailer unit transportation cost In this we consider transshipment between
=1.5km.*Rs.1.4912=Rs.2.2368/unit. one warehouse and three retailers in first stage and in
Second retailer to third retailer unit transportation second stage, lateral transshipment among three
cost retailers. In this once stocks allocated from
=1.0km.*Rs.1.4912=Rs.1.4912/unit warehouse to these three retailers then in second
stage if necessary then they can transfer among them
VII. BACK ORDER COST to fulfill the demand of customers.
Backorder costs are important for companies
to track, as the relationship between holding costs of
www.ijera.com 469 | P a g e
Amit Kumar et al Int. Journal of Engineering Research and Applications www.ijera.com
ISSN : 2248-9622, Vol. 4, Issue 2( Version 1), February 2014, pp.468-473
flour improver and permitted preservatives. Haldiram
Warehouse one warehouse is located in Pardi road Nagpur. In
this project consider three retailers who are selling
Haldiram Bread. First retailer is located 5km to
warehouse. First Retailer is located at Babu Lal ji
Takmore Marg Itawari Nagpur. Second retailer is
Retailer1 Retailer2 Retailer3 located at Nikolas Mandir sabji Mandi Itawari
Nagpur and 5.5 km distance from warehouse. Third
retailer is located at Bavsar chowk Mahal Nagpur and
6.5 km distance from warehouse.
Figure 3.2 Two stage inventory distribution model
XI. FORECASTED DEMAND
FIRST STAGE PROBLEM In this forecasted demand of products on
Objective Function= Total transportation retailers before starting the periods. Consider 10
cost from warehouse to all retailers in period p. + intervals of four days time periods. Collected
Total inventory carrying cost at warehouse in period demand on retailers of products for 10 intervals
p.
Objective Function Minimization The equation for FORECAST is a+bx, where:
TCp1= a1*X1+a2*X2 +a3*X3 + a *Z 𝑥 −𝑥 𝑦 −𝑦
a=𝑦-b𝑥 b=
In the first stage, we have the following constraints: 𝑥−𝑥 2
1. Inventory at the warehouse should be less than or Where x and y are the sample means AVERAGE
equal to the warehouse capacity in period p. (known_x's) and AVERAGE (known y's).
Z ≤ Cw
2. The total retailers forecasted demand for a period p
should be less than or equal to warehouse inventory
in that particular period p.
Z ≤ (Df1+Df2+Df3)
3. The sum of units transferred from warehouse to a
retailer should be greater than or equal to the
forecasted demand of that particular retailer in period
p.
X1 ≤ Df1, X2 ≤ Df2 , X3 ≤ Df3
4. The total number units transferred from warehouse
to a particular retailer should be less than or equal to
that retailer capacity in period p. Forecasted Demand for Period 1 (11th Interval) at
X1 ≤ Cr1 , X2 ≤ Cr2, X3 ≤ Cr3 Retailer 1.
5. The sum of the units transferred from a warehouse
to all retailers should be less than or equal to the Similarly Forecasted Demands are calculated for both
warehouse inventory for a particular period p. the retailers and for two periods.
X1+X2+X3 ≤Z
XII. INPUT DATA FOR
SECOND STAGE PROBLEM WAREHOUSE AND RETAILERS
Objective function=Total inventory carrying In this consider Haldiram bread industry that
cost of all three retailers in period p. + Total back is situated in Nagpur (India). Consider one
order cost of retailers in period p. warehouse and three retailers who are selling bread
Objective function minimization of this industry. The following data is collected for
TCp2 = (y1*I1+y2*I2+y3*I3) + (c1*Ib1+c2*Ib2+c3*Ib3) validating the above proposed model.
I=Inventory at retailer at the end of period=Stage Warehouse
Inventory at retailer at the end of stage 1-Unit
transferred to retailer to retailers. Inventory carrying cost per units
0.24625
I b =Back order at retailer at the end of period in Rupees
p=Stage back order at retailer at the end of stage 1- Warehouse Capacity in units 1200
Unit received by retailer from retailers.
Table 4.1 Input Data for warehouse.
INDUSTRY CASE STUDY:
The Sandwich Bread is made from wheat
flour, Sugar, yeast, salt, milk, refined palmolein oil,
www.ijera.com 470 | P a g e
Amit Kumar et al Int. Journal of Engineering Research and Applications www.ijera.com
ISSN : 2248-9622, Vol. 4, Issue 2( Version 1), February 2014, pp.468-473
Retailers Demand in Units
R1 R2 R3 Step 4:
Foreca Act Foreca Act Foreca Act Enter formulas for Excel to use in
sted ual sted ual sted ual calculations.
P 1. Need to enter a formula for the value of the
316 303 263 233 166 198 objective function and a formula for each constraint.
1
P 2. Each formula set up using the sum product
288 330 225 219 138 122 function. This function uses two ranges of cells,
2
Table 4.2 Retailers Demand. multiplies the values in the corresponding positions,
and then adds the values. In this case sum product
Similarly Inventory cost, transportation cost, and (B4:C4:D4:E4, B14:C14:D14:E14) will provide the
Back order cost are tabulated. same result as the formula
= B4*B14 + C4*C14 + D4*D14 + E4*E14.
In this case: 0.07456*X1 +0.082016*X2
XIII. MS EXCEL SOLVER
+0.096928*X3 + 0.24625*Z
SOFTWARE 3. By using absolute references for the cells that will
Excel has an add-in called the Solver which contain the decision variables. In this case = sum
can be used to solve systems of equations or product (B4:C4:D4:E4,$B$14:$C$14:$D$14:$E$14))
inequalities. this way enter the formula in the first cell and then
copy that formula down the column.
Step 1:
Formulate the linear programming problem.
1. Define the decision variables.
X1, X2, X3, Z (For first stage first period)
2. Write the objective function.
Objective Function Minimization
TCp1= 0.07456*X1 +0.082016*X2 +0.096928*X3 +
0.24625*Z
3. Write each constraint so that all of the decision
variables included in the constraint are written on
the left side of the expression and so that the right
side is a non-negative constant.
Step 2:
Open Excel and make sure that have Solver Formulas for Excel to use in calculations.
accessible
Step 5:
Step 3: Have Excel solve the problem
Enter information from the formulation into Excel.
Dialogue Box to solve Problem.
Select the Options button and select
“Assume Linear Model” and “Assume Non-
Negativity.” Leave all other boxes at the default
values.
Information from the formulation into Excel
www.ijera.com 471 | P a g e
Amit Kumar et al Int. Journal of Engineering Research and Applications www.ijera.com
ISSN : 2248-9622, Vol. 4, Issue 2( Version 1), February 2014, pp.468-473
Existing
Period Proposed model
(Industry)
R1 R2 R3 R1 R2 R3
P1 11 0 0 27 37 0
P2 0 0 0 0 0 28
Table 6.4 Optimal numbers of Inventory at Retailers.
Existing
Period Proposed model
(Industry)
Excel Solver Solution for Second Stage, R1 R2 R3 R1 R2 R3
First Period Similarly for different stages and periods
P1 0 0 0 0 0 18
it is formulated on excel solver.
P2 20 0 0 30 9 0
XIV. RESULTS AND Table 6.5 Number of back ordered units at retailers.
DISCUSSIONS:
After solving the model for two stages, XV. CALCULATION OF
using MS Excel Solver Software, the optimal OPTIMAL TOTAL COST IN
solutions and results for the case study are obtained.
EXISTING (INDUSTRY)
The problem is solved for 2 periods, by using the
Total supply chain cost in period one= First
industry data by considering a single warehouse and
stage cost+ Second stage cost
three retailers. These results are tabulated, compared
First stage
with the real time existing solution of the industry.
cost=330*0.07450+270*0.082016+180*0.096928+8
00*0.24625 =Rs.261.196
Period Number of units at Warehouse Second stage cost= 27*0.185+37*0.37+18*2.5
Proposed model Existing (Industry) =Rs.63.685
P1 745 800 Total supply chain cost=Rs.261.196+Rs.63.685
P2 651 750 =Rs.324.881
Table 6.1 Optimal Warehouse Stocks in units. Total supply chain cost in period second=First stage
cost+ Second stage cost
Proposed Existing First stage
Period Retailer
model (Industry) cost=300*0.07456+210*0.082016+150*0.096928+7
R1 316 330 50*0.24625=Rs.238.81806
P1 R2 263 270 Second stage
cost=28*0.4625+30*2.5+9*2.5=Rs.110.45
R3 166 180 Total supply chain cost=Rs.238.81806+Rs.110.45
R1 288 300 =Rs.349.26808
P2 R2 225 210 360
Proposed Model Existing Industry
R3 138 150 350
Optimal numbers of units transferred from warehouse
to retailer. 340
330
Total Cost
Proposed Existing
Period 320
model (Industry)
Customer R1 R2 R3 R1 R2 R3 310
R1 - 0 2 0 0 0
300
P1 R2 0 - 30 0 0 0
R3 0 0 - 0 0 0 290
R1 - 0 0 0 0 0 280
P2 R2 6 - 0 0 0 0
1 2
R3 16 0 - 0 0 0
Table 6.3 Optimal number of units transferred from
Fig.6.1Comparison of Proposed Methodology and
retailer to retailer.
Existing (Industry)
www.ijera.com 472 | P a g e
Amit Kumar et al Int. Journal of Engineering Research and Applications www.ijera.com
ISSN : 2248-9622, Vol. 4, Issue 2( Version 1), February 2014, pp.468-473
XVI. CONCLUSION AND Management, July- December 2010,
FUTURE WORK Volume 2,No.2, pp. 311-315.
In this work, two stage inventory [2] Supplychaininformation.blogspot.com
distribution systems has been considered where [3] Calvin B. Lee, Multi echelon Inventory
transshipment are allowed as resource action in order Optimization, Evant Inc.2003.
to reduce the inventory level, transferred unit and [4] Min Chen, Lateral Transshipment in
back orders. Warehouse supplied products to three Inventory Models, Vrije University
retailers, who in turn serve a large number of Amsterdam, 2008.
customers. Model has taken the distribution and [5] Metin Turkay, Linear Programming Models,
inventory carrying costs into account in the supply INDR 262 Optimization Models and
chain network at each period. Excess or low Mathematical Programming.
inventory at warehouse and retailers increases [6] K. Balaji Reddy, S. Narayanan and P.
problems such as increase in inventory carrying cost Pandian, Single-Echelon supply chain two
and back order cost. By using lateral transshipment stage distribution inventory optimization
these problems can be minimized. This is indicated models for the confectionery industry,
by the case study of bread industry where results are applied mathematical Sciences, Vol. 5,
encouraging and reduced overall system costs. By 2011, no.50, 2491-2504.
making retailers to interact and taking a decision on [7] MS Excel 2007 forecasting function.
lateral transshipment, the inventory level of different [8] www.msubillings.edu
locations at the same echelon is balanced. [9] B. Fahimnia, L. Luong and R. Marian, an
integrated model for the optimization of a
REFERENCES two- echelon supply network, Journal of
[1] Dharamvir Mangal and Pankaj Chandna, Achievements in Materials and
Lateral transshipment –A technique for Manufacturing Engineering, 2 December
inventory control in multi retailer supply 2008 Volume 31 Issue.
chain system, International Journal of [10] Avijit Banerjee, Jonathan Burton and
Information Technology and Knowledge Snehamay Banerjee, A simulation study of
lateral
www.ijera.com 473 | P a g e
