European Journal of Operational Research 137 (2002) 394400

www.elsevier.com/locate/dsw

Production, Manufacturing and Logistics

A forward recursive algorithm for inventory lot-size models

with power-form demand and shortages
Hui-Ling Yang a, Jinn-Tsair Teng
b

b,*

, Maw-Sheng Chern

a
Center of General Education, Hung Kuang Institute of Technology, Shalu 433, Taichung, Taiwan, ROC
Department of Marketing and Management Sciences, College of Business, The William Paterson University of New Jersey,
Wayne, NJ 07470-2103, USA
c
Department of Industrial Engineering and Engineering Management, National Tsing-Hua University, Hsinchu 30043,
Taiwan, ROC

Received 18 January 2000; accepted 1 March 2001

Abstract
Barbosa and Friedman (L.C. Barbosa, M. Friedman, Management Science 24 (8) (1978) 819) establish an optimal
replenishment policy for power-form demand rate. In this paper, we extend their inventory lot-size model to allow
for shortages. The goal is to nd the optimal number and time of replenishments in order to keep the total relevant
cost as low as possible during a nite planning horizon. We develop a simple forward recursive algorithm to determine the optimal replenishment timing. Furthermore, we propose an intuitively accurate estimate for the optimal
number of replenishments, which signicantly reduces computational complexity in nding the optimal replenishment
number. A numerical example is provided to illustrate the solution procedure. 2002 Elsevier Science B.V. All
rights reserved.
Keywords: Inventory; Optimization; EOQ; Power-form demand; Shortages

1. Introduction
The classical economic order quantity (EOQ)
model is widely used principally because it is
simple to use and apply. However, a major problem in using the EOQ is that it assumes a constant
demand pattern. The deviations from the as-

*
Corresponding author. Tel.: +1-973-720-2651; fax: +1-973720-2809.
E-mail address: tengj@wpunj.edu (J.-T. Teng).

sumption cause varying magnitudes of inaccuracy.

In reality, the demand may vary with time. For the
discrete case of time-varying demand pattern, it
can be solved by dynamic programming (e.g.,
Wagner and Whitin, 1958). For the continuous
time-varying demand pattern, Resh et al. (1976)
proposed an algorithm to nd the optimal replenishment number and time scheduling for timeproportional demand (i.e., f t bt, with b > 0).
Concurrently, Donaldson (1977) also derived an
analytical solution to a similar model in which the
demand trend is linear (i.e., f t a bt, with

0377-2217/02/$ - see front matter 2002 Elsevier Science B.V. All rights reserved.
PII: S 0 3 7 7 - 2 2 1 7 ( 0 1 ) 0 0 1 5 4 - 0

H.-L. Yang et al. / European Journal of Operational Research 137 (2002) 394400

a; b 6 0). Barbosa and Friedman (1978) further

generalized the solutions for various power-form
demand rates (i.e., f t btr , with b > 0, r > 2).
Henery (1979) then extended the demand function
to be any log-concave form (i.e., f t is log-concave). Recently, Triantaphyllou (1992) presented a
sensitivity analysis of the linear demand model
under various conditions.
The computational and conceptual complexities of Donaldson's optimal analytical approach
prompted many researchers to search for heuristic
methods to solve the problem. Silver (1979) oered
a heuristic algorithm, which provided the rst replenishment point to minimize the total relevant
cost per unit time. In comparison with Donaldson's examples, Silver concluded that the cost
penalties of using his heuristic were likely to be
very low. For computational simplicity, Phelps
(1980) proposed an inventory policy with a constant replenishment period, which gives only
slightly higher costs than the optimal policy with
varying replenishment periods. For conceptual
simplicity, Mitra et al. (1984) modied the EOQ
model to accommodate the case of a linear demand pattern. Their technique was simple in
concept, and easy to apply without computational
iterative schemes as Silver's. Lately, Teng (1994)
presented a hybrid solution method to the problem
by using an approximate total cost to nd the
number of replenishments, and then by applying
Donaldson's analysis to obtain the optimal time
for replenishments.
All of the above models assumed that shortages
were prohibited. Following the approach of
Donaldson, Dave (1989a,b) developed an exact
replenishment policy for an inventory model with
shortages and a linear trend in demand. To reduce
the complexity, Dave (1989a,b) also extended Silver's heuristic (1979) to solve the problem. By assuming that successive replenishment cycle lengths
were in arithmetic progression, Datta and Pal
(1991) established a more accurate approach than
Dave's. Hariga (1994) provided some insightful
properties for the problem, and developed an iterative procedure for both growing and declining
markets. Teng (1996) proposed a simple and
computationally ecient optimal method in recursive fashion to solve the problem. Recently,

395

Teng et al. (1997) investigated all four possible

shortage policies with linearly increasing demand,
and provided a forward recursive algorithm without iterative schemes to solve them. Other recent
papers related to this area are written by Benkherouf and Mahmoud (1996), Hariga and Goyal
(1995), Goyal et al. (1992), Goyal and Giri (2000),
and Yang et al. (2001).
In reality, the demand growth model, in general, is S-shaped such as Bass diusion models for
durable products (e.g., Bass, 1969). Consequently,
the power-form demand is more applicable than a
linear form because S-shaped demand patterns (in
the growth stage of the product life cycle) can be
better approximated by a power-form demand
than a linear form. In addition, the mathematical
inventory model without shortages is simply a
constrained form of the inventory model that allows for shortages (with shortage cost of innity).
Thus, in contrast to the others, we assume here
that not only the demand is a power-form, but also
shortages are permitted. We then propose a simple
and computationally ecient method in a forward
recursive manner to nd the optimal replenishment timing. Furthermore, we develop an intuitively accurate estimate for the optimal number of
replenishments, which signicantly reduces computational complexity in nding the optimal replenishment number. A numerical example is
provided to illustrate the proposed algorithm. Finally, we summarize the results and provide ways
to extend the model for future studies.
2. Assumptions and notation
The mathematical model of the inventory replenishment problem here is based on the following assumptions:
1. Lead time is zero.
2. Shortages are allowed and completely backlogged.
3. The initial inventory level is zero.
In general, when shortages occur, some customers would like to wait for backlogging, but
others would not. To encourage complete backlogging, rms need to provide incentives (which
are the shortage costs to the rms) to customers.

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H.-L. Yang et al. / European Journal of Operational Research 137 (2002) 394400

Otherwise, the unsatised demand will be lost.

Likewise, if the suppliers cannot deliver products
to retailers on time, then the suppliers should
provide retailers sucient incentives to accept
backlogging. Of course, the retailers will decide to
accept or reject the suppliers' incentives based on
their customers' choices. In practice, the shortage
cost has two possible extreme values. The upper
limit is the standard no-shortage solution (i.e., the
shortage cost is innitely large). For example, a
blood bank must maintain a certain level of inventory because the shortage cost in this case is
extremely high. On the other hand, when mailordering Christmas gifts, Valentine gifts, and
others, as long as the gifts are delivered on time,
we do not care about shortages at time of the order. Similarly, when we mail order tulips, daodils,
etc., we do not need them to be delivered right
away. It is ne as long as we can receive them in
October for the fall planting season. In this case,
the shortage cost is negligible. Consequently, the
rms can use a ``just-in-time'' inventory policy of
satisfying orders only at the next re-order point
(i.e., the fall planting season) so that no inventory
is actually kept.
In addition, the following notation is used
throughout this paper.
H
the time horizon under consideration.
f t a btr , the demand function at time t,
where a; b, and r are non-negative constants, and 0 6 t 6 H .
co
the xed replenishment cost per order.
ch
the inventory carrying cost per unit per unit
time.
cs
the shortage cost per unit per unit time.
n
the number of replenishments over 0; H (a
decision variable).
ti
the ith replenishment time, i 1; 2; . . . ; n,
with t1 P 0 and tn1 H (a decision variable).
Ki
the fraction of no-shortage in the ith cycle
[ti ;ti1 ), where 06 Ki si ti =ti1 ti 61;
i 1;2;...;n.
si
the time at which the inventory level reaches
zero in the ith cycle (ti ; ti1 ) (a decision
variable), where
si Ki ti1 1

Ki ti ;

i 1; 2; . . . ; n:

3. Mathematical model and solution

The objective of this inventory problem is to
determine the number of replenishments n, and the
timing of the reorder points fti g and the shortage
points fsi g during the whole planning horizon in
order to keep the sum of replenishment, inventory
and shortage costs as low as possible. The ith replenishment is made at ti , the quantity received at
ti is partly used to meet the accumulated shortages
in the previous cycle from time si 1 to ti (with
si 1 < ti ), and the inventory at ti gradually reduces
to zero at si (with si > ti ).
Consequently, based on whether the inventory
is permitted to start and/or end with shortages, we
have four possible models as shown in the recent
articles by Teng et al. (1997, 1999). Since the other
three models are special cases of the proposed
model that allows for shortages not only at the
initial point but also in the nal cycle, we simply
use the proposed model here. This is depicted
graphically in Fig. 1. The reader can easily obtain
similar results for the other three models.
Next, we consider the level of inventory at time
t; It, ti 6 t 6 si . The inventory level at time
t; It, during the ith replenishment cycle is governed by the following dierential equation:
dIt

dt

f t;

ti 6 t 6 si ;

with the boundary condition Isi 0. Solving the

dierential equation (2), we have
Z si
It
f u du; ti 6 t 6 si :
3
t

As a result, the cumulative inventory level during

the ith cycle is
Z si
Z si
It dt
t ti f t dt;
Ii
4
t1
ti
i 1; 2; . . . ; n:
Similarly, the cumulative shortage during the ith
cycle is
Z ti1
Si
ti1 tf t dt; i 0; 1; . . . ; n:
5
si

H.-L. Yang et al. / European Journal of Operational Research 137 (2002) 394400

397

Fig. 1. Graphical representation of inventory level.

Therefore, the total relevant cost of the inventory

system during the planning horizon H when n
orders are placed is as follows:
Cn; fsi g; fti g nco ch

n
X

Ii cs

i1

n
X

Si :

i0

and
si

1
V
ti1
ti ;
1V
1V

i 1; 2; . . . ; n:

10

Next, integrating both sides of (8), we obtain

1V
r1
a bti
V
i 1; 2; . . . ; n:

a bsi

r1

1
r1
a bsi 1 ;
V

Thus, the problem here is to nd an integer n and

a vector of 2n components ht1 ; s1 ; t2 ; . . . ; tn ; sn i
with 0 s0 < t1 < s1 <


< tn < sn < tn1 H such
that the total relevant cost in (6) is minimized.
For a xed value of n, the necessary conditions
for Cn; fsi g; fti g to be minimized are as follows:

After applying (10) into (11), we obtain the following relation between ti 's:

oCn; fsi g; fti g=osi 0;

a bti1 V a bti r1

i 1; 2; . . . ; n;

f1 V r2 a bti r1

and

r1

oCn; fsi g; fti g=oti 0;

a bti V a bti 1
i 2; 3; . . . ; n;

i 1; 2; . . . ; n;

si

si ;

ti

f t dt;

i 1; 2; . . . ; n;

i 1; 2; . . . ; n;

respectively, where V ch =cs . Substituting (1) into

(7), we have
Ki

12

r1

ti cs ti1

and
Z si
Z
V
f t dt
ti

g=V ;

and

which lead to
ch si

11

cs =ch cs 1=1 V  K;

a bt2 V a bt1
1 V

r2

a bt1

r1

ar1 =V :

13

4. A forward recursive algorithm

For simplicity, let us dene gi by
gi a bti =a bt2 ;
i 1; 2; . . . ; n 1:

14

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H.-L. Yang et al. / European Journal of Operational Research 137 (2002) 394400

Applying (14) into (12) and (13), we have

Next, we establish a solution procedure for

nding the optimal number of replenishments, n .
For simplicity, let

1 Vg1 r1
1 V
g2 1;

r2 r1
g1

a=a bt2

r1

=V ;
15

gi1 Vgi r1
1 V r2 gir1

Cn Cn; fsi g; fti g:

gi Vgi 1 r1 =V ;

i 2; 3; . . . ; n:
Since tn1 H , we know from (14) that the optimal replenishment time fti g can be easily obtained
as follows:
ti gi =gn1 a bH
i 1; 2; . . . ; n:

17

It has been proven from Hariga (1996) and Teng

et al. (1999) that the total relevant cost is a strictly
convex function of the number of replenishments.
Therefore, the search for the optimal number of
replenishments is simplied to nd a local minimum. Now, we propose an accurate estimate of
the optimal number of replenishments as shown in
Teng (1996).
n rounded integer of

a=b;
16

It is clear from (10) and (16) that the optimal solution fsi g and fti g not only exists but is also
unique (i.e., the optimal values of fsi g and fti g are
uniquely determined by Eqs. (10) and (16)). Consequently, it reduces the 2n-dimensional problem
of nding fsi g and fti g to a one-dimensional
problem. From (15), we only need to nd t2 to
generate gi ; i 1; 2; . . . ; n 1, uniquely by repeatedly using (15). For any chosen t2 , if
gn1 a bH =a bt2 , then t2 is chosen correctly. Otherwise, we can easily nd the optimal t2
by standard search techniques. We then apply (10)
to obtain fsi g. For any given value of n, the solution procedure for nding fti g is summarized in
the following algorithm.
Algorithm 1. For nding optimal replenishment
timing {ti }
Step 0. Choose two trial values of t2 , say
L 1 2V H =n1 V and U 21 2V H =
n1 V . Compute the corresponding values of
gn1 by using (15), say M and W , respectively.
Step 1. Let t2 L U LH M=W M,
and calculate the corresponding gn1 .
Step 2. If gn1 a bH =a bt2 is suciently small, then use (16) to nd fti g and stop.
Step 3. If gn1 a bH =a bt2 is signicantly larger than zero, then set U t2 , W gn1 ,
and go to Step 1. Otherwise, set L t2 ; M gn1 ,
and go to Step 1.

fch cs QH H =2co ch cs g1=2 ;

18

where
Z
QH

H
0

f t dt

a bH

r1

ar1 =br 1:

19

It is obvious that searching for n by starting with

n in (18) instead of n 1 will reduce the computational complexity signicantly. Thus, we propose
the following procedure for nding the optimal
replenish number and schedule.
Algorithm 2. For nding optimal number and
schedule
Step 0. Choose two initial trial values of n , say
n as in (18) and n 1. Use Algorithm 1 to search
for fti g, then obtain fsi g by (10), and compute the
corresponding Cn and Cn 1, respectively.
Step 1. If Cn P Cn 1, then compute
Cn 2;Cn 3;...; until we nd Ck < Ck 1.
Set n k and stop.
Step 2. If Cn < Cn 1, then compute
Cn 1;Cn 2;..., until we nd Ck < Ck 1.
Set n k and stop.

5. A numerical example
To illustrate the results, we apply the proposed
methods to solve the following numerical example.

H.-L. Yang et al. / European Journal of Operational Research 137 (2002) 394400

399

Acknowledgements

Table 1
Optimal solution of Example 1
i

gi

ti

si

0
1
2
3
4
5
6
7
8

0.6648
1.0000
1.2564
1.4714
1.6601
1.8301
1.9861
2.1310

0.0826
0.2923
0.4528
0.5873
0.7053
0.8117
0.9093
1.0000

0.0000
0.2457
0.4171
0.5574
0.6791
0.7881
0.8876
0.9798

Example 1. Let r 2, a 10, b 30, H 1,

co 4:5, ch 1, cs 3:5 in the appropriate units.
From (18), we search for n starting with the two
trial values 7 and 6 as described in Algorithm 2,
and the corresponding minimum total relevant
costs: C6 67:34 and C7 66:13. Since
C8 66:34, we know that the optimal replenishment number is 7. By using Algorithm 1, we
obtain the optimal replenishment schedule as
shown in Table 1.
6. Conclusions
In general, the demand growth model is Sshaped such as Bass diusion models for durable
products (e.g., Bass, 1969). Consequently, the
power-form demand function is more applicable
than a linear form in the growth stage of the
product life cycle. In this paper, we assume that
the demand function is power-form. We then develop not only a simple forward recursive algorithm to determine the optimal replenishment
timing, but also an intuitively accurate estimate for
the optimal number of replenishments, which signicantly reduces computational complexity in
nding the optimal replenishment number.
The model can be extended in several ways. For
example, we may consider the deterministic case as
well as stochastic case in which demand patterns
are uctuating. Moreover, we may extend the
model to incorporate with deterioration rate,
quantity discounts, ination factor, and others.
Finally, in a later paper (Teng et al., 2000), we
generalize the model to allow for uctuating demand as well as unit purchase cost.

The authors would like to thank the referees for

their valuable comments. This research was partially supported by the National Science Council of
the Republic of China under Grant NSC-89-2213E-007-135. The second author's research was supported by the Assigned Released Time for research
from the William Paterson University of New
Jersey.
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