1.

INTRODUCTION

1.1 OPERATIONS RESEARCH

‘Operations Research’ was coined during the World War II, but the
scientific origin of the subject dates much further back. Economist Quesnay
in 1759 and Walras in 1874 have developed primitive mathematical
programming models. More sophisticated economic models of a similar
genre were proposed by Von Newmann in 1937 and Kantrovich in 1939. The
mathematical foundations of linear models were established near the turn of
the 19th century by Jordan in 1873, Minkowski in 1896 and Farkas in 1903.
Many definitions of Operations Research are available. The following are
a few of them. In the words of T.L Saaty, “operations research is the art of
giving bad answers to problem which otherwise have worse answers”.
According to Fabrycky and Torgersen, “operations research is the application
of scientific methods to problems arising from the operations involving
integrated system by man, machine and materials. It normally utilizes the
knowledge and skill of an interdisciplinary research team to provide the
managers of such systems with optimum operating solutions”. Churchman,
Ackoff and Arnoff observe, “operations research in the most general sense
can be characterized as the application of scientific methods, techniques and
tools to problems involving the operations of a system so as to provide those
in control of the operations with optimum solutions to the problems”.
In a nutshell, operations research is the discipline of applying advanced
analytical methods to help make better decisions. The rapid growth of
operations research during and after World War II stemmed from the same
root with the application of mathematics to build and understand models that
only approximate the reality being studied. During World War II, the military
depots had the problems of maintaining their inventory such as their
materials, arms, ammunition and fuel etc., and hence the optimal utilization
of the same was needed with a view to minimize their costs. So, the military
management called-on Scientists from various disciplines and organized
them into teams to assist in solving strategic and tactic problems.

1
 Operations research as a field has always tried to maintain its
multidisciplinary character and its uniqueness. Operations research
comprises of various branches which includes Inventory control, Queuing
theory, Mathematical Programming, Game theory and Reliability methods. In
all these branches many real life problems are conceptualized as
mathematical and stochastic models. In operations research, a model is
almost always a mathematical and necessarily an approximate
representation of reality. Operations research gives the executive’s power to
make more effective decisions and build more productive systems based on
More complete data, Consideration of all available options, Careful
predictions of outcomes and estimates of risk and finally on the latest
decision tools and techniques.
During model building in operations research, the researcher draws upon
the latest analytical technologies, such as i) Probability and Statistics
for helping measure risk, mine data to find valuable connections, insights,
test conclusions and make reliable forecasts. ii) Simulation for giving the
ability to try out approaches and test ideas for improvement. iii) Optimization
for narrowing choices to the best when there are virtually innumerable
feasible options.
Operations researcher and computer scientists have been implementing
inventory systems, while the economists have been focusing on the effect of
inventories in the business cycle rather than inventory policies. Mainly,
operations research provides tools to (i) analyze the activity (ii) assist in
decision making, (iii) enhancement of organisations and experiences all
around us. Application of operations research involves better scheduling of
airline crews, the design of waiting lines at Disney theme parks, two-person
start-ups to Fortune 500® leaders and global resource planning decisions to
optimizing hundreds of local delivery routes. All benefit directly from
operations research decision.
Inventory control is one of the most developed fields of operations
research. Many sophisticated methods of practical utility were developed in
inventory management by using tools of mathematics, stochastic process
and probability theory. The primary motivation of this thesis is to analyse the
few inventory model from Hanssman F [33] using the stochastic concept with
2
varying demand distribution. Hence this study is followed in the succeeding
chapters.

1.2 INVENTORY THEORY

Inventory has been defined by Monks, as idle resources that have certain
economic value. Usually, it is an important component of the investment
portfolio of any production system. Keeping an inventory for future sales and
utilizing it whenever necessary is common in business. For example, Retail
firms, wholesalers, manufacturing companies and blood banks generally
have a stock on hand. Quite often, the demand rate is decided by the
amount of the stock level. The motivational effect on the people is caused by
the presence of stock at times. Large quantities of goods displayed in
markets according to seasons, motivate the customers to buy more. Either
insufficient stock or stock in excess, both situations fetch loss to the
manufacturer.

1.3 DEFINITION

This section lists the factors that are important in making decisions
related to inventories and establishes some of the notation that is used in this
thesis. Additional model dependent notations are introduced in the
subsequent Chapters.
1. Holding cost (𝝋𝟏 ): This is the cost of holding an item in inventory for
some given unit of time. It usually includes the loss investment income
caused by having the asset tied up in inventory. For example, if c is the unit
cost of the product, this component of the cost is c 𝛼, 𝛼 is the discount or
interest rate. The holding cost may also include the cost of storage,
insurance and other factors that are proportional to the amount stored in
inventory.
2. Shortage cost (𝝋𝟐 ): When a customer seeks the product and finds the
inventory empty, the demand can either go unfulfilled or be satisfied later
when the product becomes available. The former case is called a lost sale,

3
and the latter is called a backorder. Although lost sales are often important in
inventory analysis. The total backorder cost is assumed to be proportional to
the number of units backordered and time the customer must wait.
3. Ordering cost (𝑪(𝒁)): This is the cost of placing an order to an outside
supplier or releasing a production order to a manufacturing shop. The
amount ordered is 𝑍 and its function is given as 𝐶(𝑍).
4. Setup cost (𝑲): A common assumption is that the ordering cost consists
of a fixed cost that is independent of the amount ordered, and a variable cost
is dependent on the amount ordered.
5. Product cost (𝑐): This is the unit cost of purchasing the product as part of
an order. If the cost is independent of the amount ordered, the total cost is
𝑐𝑧, 𝑐 is the unit cost and 𝑧 is the amount ordered.
6. Demand rate (𝑸): This is the constant rate at which the product is
withdrawn from inventory.
7. Order level (𝒁): The maximum level reached by the inventory is the order
level. When backorders are not allowed, this quantity is the same as 𝑄.
When backorders are allowed, it is less than 𝑄.
8. Cycle time (𝝉): The time between consecutive inventory replenishments is
the cycle time.
9. Cost per time (𝑻): This is the total of all costs related to the inventory
system that are affected by the decision under consideration.
̂, 𝒁
10. Optimal Quantities (𝑸 ̂ , 𝝉̂, 𝑻
̂ ): The quantities defined above that
maximize profit or minimize cost for a given model are the optimal solution.
11. Shortages Backordered: The stochastic model considered in this thesis
allows shortages to be backordered. This situation is illustrated in figure 1.1.
In this model, when the inventory level decreases below the 0 level, then it
implies that a portion of the demand is backlogged. The maximum inventory
level is considered as 𝑆 and occurs when the order arrives. The maximum
backorder level is 𝑄 – 𝑆 and backorder is represented in the figure 1.1 by a
negative inventory level.

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 Figure 1.1 Lot-size model with shortages allowed

12. Random Variable: A random variable, usually written as 𝑋, is a variable

whose possible values are numerical outcome of a random phenomenon.
There are two types of random variables, discrete and continuous.
13. Discrete random variable: A discrete random variable is one which may
take on only a countable number of distinct values such as 0, 1, 2, 3, 4,… If a
random variable can take only a finite number of distinct values, then it said
to be discrete. Examples for discrete random variables include the number of
children in a family, the number of patients in a doctor's surgery and the
number of defective light bulbs in a box of ten.
14. Continuous random variable: A continuous random variable is one,
which takes an infinite number of possible values. Continuous random
variables are usually measurements. Examples include height, weight, the
amount of sugar in an orange and the time required to run a mile. A
continuous random variable is not defined at specific values. Instead, it is
defined over an interval of values, and is represented by the area under a
curve. The probability of observing any single value is equal to 0, since the
number of values which may be assumed by the random variable is infinite.
15. Random Variable for Demand (𝑸): This is a random variable that is the
demand for a given period of time. The random variable defined for a
particular period may differ with the models considered.
16. Discrete Demand Probability Distribution Function (𝑷(𝑸)): When
demand is assumed to be a discrete random variable, 𝑃(𝑄) gives the
probability that the demand equals 𝑄.

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17. Discrete Cumulative Distribution Function (𝑭(𝒃)): The probability that
demand is less than or equal to b is 𝐹(𝑏) when demand is discrete then
𝐹(𝑏) = ∑𝑏𝑄=0 𝑃( 𝑄) (1.1)
18. Continuous Demand Probability Density Function (𝒇(𝑸)): When
demand is assumed to be continuous, 𝑓(𝑄) is its density function. The
probability that the demand is between 𝑎 and 𝑏 is
𝑏
𝑃(𝑎 ≤ 𝑄 ≤ 𝑏) = ∫𝑎 𝑓(𝑄)𝑑𝑄 (1.2)
When the demand is assumed to be nonnegative, then 𝑓(𝑄) is zero for
negative values.
19. Continuous Cumulative Distribution Function (𝑯(𝒃)): The probability
that demand is less than or equal to 𝑏 when demand is continuous then
𝑏
𝐻(𝑏) = ∫𝑎 𝑓(𝑄)𝑑𝑄 (1.3)
20. Standard Normal Distribution Function 𝝓(𝑸) and 𝚽(𝑸): These are
the density function and cumulative distribution function for the standard
normal distribution.
The study of inventory control requires a practical example for better
understanding. Hence, in figure 1.2 two figures on sample path are shown
one in environment process and other in inventory process.

Figure 1.2: A sample path of the (environment–inventory) process

A sample path of the environment-inventory level process of K. Yan et.al

[79] is illustrated in figure 1.2, where 𝑍(𝑡) is the production rate and 𝑋(𝑡) is

6
demand rate are associated with each state of the inventory system. ‘𝑆𝑖 ’ is
taken as the supply in the interval (0, 𝑡). The inventory increases when the
production rate exceeds the demand rate, and decreases when the demand
rate exceeds the production rate. For example, the inventory level under
continuous review is viewed as a fluid process that fluctuates according to
the evolution of the underlying background environment.
The subject of inventory control is a major consideration in many
situations, because of its practical and economic importance. Questions
must be constantly answered as to when and how much raw material should
be ordered, when a production order should be released to the plant, what
level of safety stock should be maintained at a retail outlet, or how in-process
inventory is to be maintained in a production process. These questions are
amenable to quantitative analysis with the help of inventory theory.
The modern inventory theory offers a variety of economical and
mathematical models of inventory systems together with a number of
methods and approaches aimed at achieving an optimal inventory policy.
The main steps in applying a systematic inventory control are outlined as
follows.
a) Formulating a mathematical model by describing the behavior of the
inventory system.
b) Seeking an optimal inventory policy with respect to the model.
c) Using a computerized information processing system to maintain a
record of the current inventory levels.
d) Using this record of current inventory levels, applying the optimal
inventory policy to indicate when and how much to replenish
inventory.
In the conceptualization of inventory control, various costs and different
variables such as control variables and non-control variables are
incorporated. It is quite interesting to observe that the inventory model can
be either deterministic or probabilistic. If the model is probabilistic in nature
then, the probability theory and stochastic processes plays a vital role in the
formulation of the model and also in the determination of optimal solution.
Optimization techniques such as dynamic programming and calculus
based methods to find optimal inventory policies have been studied by Arrow
7
K.J et.al [6]. Using linear programming principles and competitive bidding
methods many models have been developed by Hanssmann F et.al [32].
Arrow K.J et.al [6, 7] has studied a generalized model of inventory control
encompassing many inventory situations. A model for the optimal discharge
of water from a reservoir has been developed in Little J.D.C [40]. A
systematic review of such models is seen in Whitin T. M [77]. After a period
of dormancy in the 1960’s and 1970’s, empirical work on inventories has
enjoyed resurgence in the 1980’s and 1990’s. Inventory control model in the
literature is classified according to its deterministic and continuous nature.

1.4 CLASSIFICATION OF INVENTORY CONTROL MODEL

The study on inventory control deals with two types of problems such as
single-item and multi-item problems. Concerning the process of demand for
single-items, the mathematical inventory models are divided into two large
categories deterministic and stochastic models which is shown in figure 1.3

Figure 1.3: Classification of inventory control model

In single-item stochastic models, the rate of demand for products

stocked by the system is considered to be known with uncertainty and it is
called stochastic demand and when the demand is known with certainty it is
considered to be deterministic. Also in single-item, the deterministic demand
is either a constant quantity i.e., deterministic static model or a known

8
function of time i.e., deterministic dynamic model. Multi-period is further
subdivided into periodic review and continuous review.
Many of the available stochastic models and their solutions are used here
to conceptualize some interesting new problems and solve them. The
problems which are conceptualized on certain hypothetical assumptions are
in Inventory Control, Reliability Theory and Queuing theory. All these
disciplines depend more and more for their development and sophistication,
the use of advanced probability theory for which stochastic process is a basic
structure. Many of the real life problems which are governed by chance
mechanism are deeply involved with the concept of stochastic process. An
important aspect in the theory of stochastic process is the renewal theory
which is from the mathematical view point and at the same time is a handy
tool to solve many problems of stochastic process.
One of the inventory models that have recently received renewed
attention is the Newsboy problem and Base stock system problem. Hadley G
et.al [29] and Hanssman F [33] have been credited for the seminal work on
the classical version of these problems. Their models have been the
foundation for many subsequent works by extending the original models to
other diverse scenarios and applications. Nevertheless, despite its
importance and the numerous publications related to the Newsboy problem
or the multi-product Newsboy model and its variations remain limited.
The basic problem of inventory control or inventory management is to
determine the optimal stock size and optimal reorder size. Determination of
the time to reorder is also a question. A very detailed and application
oriented treatment of this subject is seen in Hanssman F [33].

1.5 CLASSIFICATION OF CLASS OF INVENTORIES

The classification of the class I, II, III, IV and V of inventories are

discussed in form of Table 1.1.

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 Table 1.1 Classification of inventories
Class Inventory 𝐼0 Supply process 𝑎(𝑄) Demand 𝑏(𝑄)
I Raw Material Supplier Production
II Work in process Production Production
III Finished goods Production Wholesaler
IV Wholesale Manufacturer Retailer
V Retailer Wholesaler Consumer

The inventory on hand at any time ‘t’ is given by

𝑡
𝐼(𝑡) = 𝐼0 + ∫0 [𝑎(𝑄) − 𝑏(𝑄)]𝑑𝑄 (1.4)
Where
𝑎(𝑄) = supply rate / unit time
𝑏(𝑄) = demand rate / unit time
𝐼0 = initial or starting inventory level.
In an inventory system, if the supply and demand is from a single
source, then it is called a single station model. If there are many supply
sources and similarly several sources of demand and a number of stations
operate simultaneously then it is called a system of parallel stations model.
A system of stations is called a series of station model, if the output of one
station is the input for the next, which are in series. The solution to any
model depends upon these three characteristics. If the supply and demand
namely 𝑎(𝑄) and 𝑏(𝑄) are constant over time, then it is called a static
system, otherwise it is called a dynamic one. The inventory problems in real
life situation, is conceptualized as a stochastic model and involves the
optimization of inventory problem.

1.6 OPTIMIZATION OF AN INVENTORY PROBLEM

In the case of stochastic models, the periodic approach of expressing

demand is preferred to be a continuous (demand rate) approach. In doing so,
the two costs namely the cost of excess inventory which is also known as the
salvage cost and shortage cost is incorporated into the model. If the demand
is more than the supply the shortage may arise and hence the stock-out cost

10
is incorporated. The solution is derived by using the standard mathematical
tools and techniques. If the derived solution is optimal, then process of
solution is complete. The objective of obtaining the optimal solution is to
determine the solution which minimizes the overall cost. It is known as the
optimal policy. In addition, the cost of reordering, the optimal reorder size as
well the time at which the reordering is to be made has been incorporated by
many authors for the optimization of inventory problem.
It may be observed that the demand depends upon many factors like
market conditions, availability of substitutes etc., and hence it is not under
the control of the decision maker. On the other hand the supply is under the
control of the decision maker and hence called the control variable. The
demand and supply are two different variables associated with the inventory
model. If the demand is assumed to be a random variable then the demand
is called the probabilistic demand. Another aspect is the static or dynamic
aspect of demand and also the supply. If the demand and supply do not
change with the passage of time, it is called static demand and static supply,
respectively otherwise it is called dynamic.
In many problems of inventory control, obtaining the optimal size of
the supply is a prime interest. Hence the optimal solution is often the
determination of the supply size. A similar approach is to determine the time
of reorder and quantity of reorder. If the demands as well as the supply are
probabilistic in nature then the probability distributions are taken into account
and the expected cost is obtained. The solution which minimizes the
expected cost is the optimal solution.
It may be noted that the recent approach to find the optimal solution
takes into consideration another fact. The demand distribution may undergo
a parametric change, after a particular value of the random variable involved
in the model and the point at which the change occurs is called the truncation
point. Sometimes after the truncation point, the distribution of demand which
is a random variable can undergo a change of distribution itself. Such facts
are also incorporated in the model and the optimal solution is derived.
Another interesting area of research in inventory control has come up
recently. It is the so called perishable inventory theory. There are many
products such as vegetables, food products, fruits and pharmaceutical
11
products in which deterioration occurs. After a certain period the entire lot
unsold will deteriorate completely and hence cannot be sold. In such models,
the rate of deterioration is an important aspect of consideration and these
models were studied using exponential and Weibull distribution.
In this thesis, the contribution follows the following tools for analysis
of inventory systems subject to supply disruptions such as i) exact and
approximate expected cost functions when supply is disrupted and demand
is stochastic. ii) A closed-form approximation for the optimal base-stock level
when supply is disrupted and demand is stochastic. iii) A closed-form
approximation for the optimal base-stock level when demand is disrupted
and supply is stochastic.
Hence, this thesis involves the concept of closed form in chapter 4
and chapter 5 with the application of stochastic process.

1.7 STOCHASTIC PROCESS

Stochastic process is concerned with the sequence of events

governed by probabilistic laws. Many applications of stochastic process are
available in Physics, Engineering, Mathematical Analysis and other
disciplines. In some cases, arising in certain industries or military installations
not only the demand for a particular commodity is a stochastic variable but its
supply as well. In these cases it is convenient to consider the inventory level
resulting from the interaction of supply and demand as a stochastic variable.
The variation of the inventory level in time can be considered as a stochastic
process.
If the process is ergodic, the total inventory cost over a certain time 𝑇
may be represented as a function of the mean inventory level. This mean
level can then be manipulated in such a way as to minimize the total
inventory cost. In case of a stochastic process, if a specific ordering policy is
introduced then the resultant fluctuating inventory level is a stochastic
phenomenon. Also it becomes a problem to investigate the transient and
stationary characteristics of the underlying stochastic process.
A special class of problems arises, if a situation where the system is
already in a stationary state is assumed, and where the acquisition policy
12
has no apparent relation to the inventory level. In the case discussed above
the mean inventory level becomes a decision variable. As an example liquid
flowing in random fashion in and out of storage tank is considered. The
fluctuation of the inventory level is then a stochastic process.
Recently, the problem of how to determine optimum mean inventory
levels has arisen frequently in large industrial concerns, where it appears to
be a consequence of the institutional framework of the modern firm. In many
of the integrated companies of today, the principle of decentralized
management has become a well established fact. This has led with necessity
in many cases to the practice of sub-optimization, because if a large
industrial enterprise is subdivided for administrative purpose into several
rather independent acting departments, such as production, transportation,
manufacturing, distribution, sales-department etc.
It will often happen that the different decision parameters, which are
necessary to decide upon in order to achieve an overall optimization, are
controlled by different departments. For example, in an integrated oil
company, the size and composition of the crude oil inventories held by the
manufacturing department at the refineries are the result of the interaction of
the crude oil supply from overseas areas. It is managed and controlled by the
production and transportation departments on the one hand and the demand
for the finished goods coming from the distribution and sales departments on
the other hand. Thus, the manufacturing department is left with just one
decision variable under its direct control which is the mean inventory level.
This is in general manipulated by exchange with oil companies. This concept
of decentralisation is discussed in chapter 3.
Uncertainty plays an important role in most inventory management
situations. The retail merchant needs enough supply to satisfy customer
demands, but ordering too much increases holding costs and the risk of
losses through obsolescence or spoilage. A fewer order increases the risk of
lost sales and unsatisfied customers. For example, the water resources
manager must set the amount of water stored in a reservoir at a level that
balances the risk of flooding and the risk of shortages. Hence, this concept of
shortage and holding is analyzed throughout the thesis.

13
 The company manager sets a master production schedule
considering the imprecise nature of forecasts of future demands and the
uncertain lead time of the manufacturing process. These situations are
common and the answer one gets from a deterministic analysis varies often
when uncertainty prevails. The decision maker faced with uncertainty may
not act in the same way as the one who operates with perfect knowledge of
the future.
The inventory model in which the stochastic nature of demand is
explicitly recognized is dealt. In inventory theory, demand for the product is
considered to be one of the features of uncertainty. In this thesis, the
demand is assumed to be unknown and the probability distribution of
demand is known. Mathematical derivation determines the optimal policies in
terms of the distribution and selecting an appropriate distribution for the
study is very important.

1.8 SELECTING A DISTRIBUTION

In this thesis, the prime motivation is to study which distribution may

be suitable for the representation of demand. A common assumption is that
individual demand occurs independently. This assumption leads to the
Poisson distribution when the expected demand in a time interval is small
and the normal distribution when the expected demand is large. Later the
uniform distribution and the exponential distribution were used for their
analytical simplicity. Erlang distribution was prime interest for the solution of
inventory problem in 2000’s. Hence, the literature suggests that other
distributions can be assumed for demand.
Hence, motivated from the view of usage of other distribution, this
thesis involves the study of single-period model and multi-period model using
SCBZ property, renewal reward theory, truncated exponential distribution,
exponential order statistics and generalized gamma distribution with bessel’s
function. Once decided on the demand distribution to be applied, the next
aim is to find the total expected cost of the inventory problems under study of
this thesis.

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1.9 STOCHASTIC INVENTORY MODEL

Often, there is some concern about the relation of demand during

some time period which is relative to the inventory level at the beginning of
the time period. If the demand is less than the initial inventory level and there
is an inventory remaining at the end of the interval then the condition of
excess incurs. If the demand is greater than the initial inventory level then
the condition of shortage incurs. At some point, the inventory level is
assumed to be a positive value 𝑍. During some interval of time, the demand
is a random variable 𝑄 with PDF 𝑓(𝑄) and CDF 𝐹(𝑄). The mean and
standard deviation of this distribution are 𝜇 and 𝜎 respectively. With the given
distribution, the probability of a shortage 𝑃𝑆 and the probability of excess 𝑃𝐸
are computed. For a continuous distribution, 𝑃𝐸 and 𝑃𝑆 is given as
𝑍
𝑃𝐸 = 𝑃{𝑄 ≤ 𝑍} = ∫0 𝑓(𝑄)𝑑𝑄 = 𝐹(𝑍) (1.5)
∞
𝑃𝑆 = 𝑃{𝑄 > 𝑍} = ∫𝑍 𝑓(𝑄)𝑑𝑄 = 1 − 𝐹(𝑍) (1.6)
In some cases it may be interesting to obtain expected
shortage 𝜓1 (𝑄). This depend on whether the demand is greater or less than
𝑍
0 , 𝑖𝑓 𝑄 ≤ 𝑍
Items short ={ (1.7)
𝑄 − 𝑍, 𝑖𝑓 𝑄 > 𝑍
Then 𝜓1 (𝑄) is the expected shortage and is
∞
𝜓1 (𝑄) = ∫𝑍 (𝑄 − 𝑍)𝑓(𝑄)𝑑𝑄 (1.8)
Similarly for excess, the expected excess is 𝜓2 (𝑄)
𝑍
𝜓2 (𝑄) = ∫0 (𝑍 − 𝑄)𝑓(𝑄)𝑑𝑄 (1.9)
Also the expected excess can be represented in terms of 𝜓1 (𝑄)
∞ ∞
𝜓2 (𝑄) = ∫0 (𝑍 − 𝑄)𝑓(𝑄)𝑑𝑄-∫𝑧 (𝑍 − 𝑄)𝑓(𝑄)𝑑𝑄
= 𝑍 − 𝜇 + 𝜓1 (𝑄) (1.10)
Hence, this concept of stochastic process has similarity with the model
discussed in Hanssman F [33] which is the prime motivation behind this
research work.

15
1.10 PRELIMINARY CONCEPTS AND RESULTS

The following are some of the basic, existing and recently developed
concepts in Mathematics and Statistics that are used to analyse some
inventory models in this thesis.

1. SETTING THE CLOCK BACK TO ZERO (SCBZ) PROPERTY: In

stochastic process when considering sequence of random variables each
random variable has an associated probability distribution. So, the probability
distribution function of random variable 𝑄 is denoted as 𝑓(𝑄). For every
probability distribution there are corresponding one or more parameters. The
corresponding distribution function is denoted as 𝐹(𝑍), and 𝑆(𝑍) = 1 − 𝐹(𝑍)
is called the survivor function and it gives the probability that a random
variable 𝑄.
For example, if a random variable 𝑄 is distributed as exponential with
parameter 𝜃 then 𝑄~𝑓(𝑄, 𝜃) = 𝜃𝑒 −𝜃𝑄 . Hence, exponential distribution
satisfy the lack of memory property and there is slight modification of this
property known as Setting the Clock Back to Zero (SCBZ) property which
was introduced by Raja Rao et.al [53].This property is given as, a family of
life distribution {𝑓(𝑄, 𝜃), 𝑄 ≥ 0, 𝜃 ∈ Ω}, (where Ω is the space parameter) is
said to have the ‘Setting the Clock Back to Zero’ (SCBZ) property if 𝑓(𝑄, 𝜃)
remains unchanged except for the value of the parameters under the
following three cases,
(i) Truncating the original distribution at some point 𝑄0 ≥ 0
(ii) Considering the observable distribution for inventory control 𝑄 ≤ 𝑄0
and 𝑄 > 𝑄0
(iii) Let 𝑄0 be a truncation point and 𝑄 be fixed. If 𝑓(𝑄, 𝜃) → 𝑓(𝑄, 𝜃 ∗ ), 𝜃 ∗ ∈
Ω, then
𝑄~𝑓(𝑄, 𝜃1 ) When 𝑄 ≤ 𝑄0
𝑄~𝑓(𝑄, 𝜃2 ) When 𝑄 > 𝑄0 (1.11)
Setting the clock back to zero property is the prime interest of study
throughout the thesis and it is discussed in chapter 3 and 5.

16
2. CHANGE OF DISTRIBUTION AT A CHANGE POINT: The concept of
SCBZ property indicates that a random variable 𝑄 with density function 𝑓(𝑄)
undergoes a parametric change after a certain value of 𝑄 say 𝑄0 which is
called the truncation point. This is a slight modification of the lack of memory
property. An extension of this concept is change of distribution after a
change point.
For example, if 𝑄 is a random variable denoting the life time of the
component and 𝑓(𝑄, 𝜃) is the probability density function then the random
variable undergoes a change of distribution after a change point, when the
following condition is satisfied.
The random variable 𝑄 has a PDF 𝑓(𝑄) with CDF 𝐹(𝑄), whenever
𝑄 ≤ 𝑄0 and it has PDF ℎ(𝑄) with CDF 𝐻(𝑄) if 𝑄 > 𝑄0 . Here 𝑄0 is called the
change point. It can be noted that
𝑄0 ∞
∫0 𝑓(𝑄) 𝑑𝑄 + ∫𝑄 ℎ(𝑄) 𝑑𝑄 = 1 (1.12)
0

The concept of change of distribution is discussed in Stagnl D.K [71].

An application of this property in shock model cumulative damage process
has been introduced by Suresh Kumar R [72]. The detailed study on this
concept is given in chapter 7.
3. TRUNCATED EXPONENTIAL DISTRIBUTION: Suppose that 𝑄 is a
random variable with exponential Probability Density Function (PDF) of mean
1
(𝜃) then the PDF of the random variable 𝑄 is truncated on the right at 𝑄0 is

given by Deemer W.L et.al [18] and the maximum likelihood estimator of the
parameter 𝜃 is derived in the form of truncated exponential distribution as
𝜃 exp(−𝜃𝑄) (1 − 𝑒 −𝜃𝑄0 ), 0 < 𝑄 < 𝑄0
𝑓(𝑄, 𝜃) = { (1.13)
0 , 𝑜𝑡ℎ𝑒𝑟𝑤𝑖𝑠𝑒
4. RENEWAL REWARD THEORY: Chang H.C et.al [12] revisited the work
of Wee H.M et al [76] and adopted the suggestion of Maddah B et.al [41] to
use renewal reward theorem to derive the expected profit per unit time for
their model. Exact closed-form solutions were derived for the optimal lot size,
backordering quantity and maximum expected profit. Given the attention
received by the Salameh M.K et.al [61], it was important to enhance it and
correct any flaws in the problems. Renewal theory to obtain the exact
expression for the expected profit is applied. This approach leads to a

17
simpler expression for the optimal order quantity than that in Salameh et.al
[61]. The annual profit function in the simplified way is given by
(𝜑1 +𝜑2 )𝜓 𝑄𝜑1 𝜑1 +𝑄 2𝜓 𝜑1
𝑓(𝑍, 𝑄) = [𝑍 − (𝜑 ] + [𝜓 + 𝑄 − 𝜑 ] (1.14)
2𝑄 1 𝜑2 )𝜓 2𝜓 0 1 +𝜑2

Truncation exponential distribution and renewal reward concepts are

discussed in chapter 4, 5 and 7.
5. PHASE TYPE DISTRIBUTIONS: Poisson process and exponential
distribution have mathematical properties that make the inventory models as
demand process or service time or replenishment time distribution. However,
in applications these assumptions are highly restrictive. Neuts M.F [48]
developed the theory of PH-distributions and related point process as an
alternative of the above distributions. In stochastic modelling, PH-
distributions lend themselves naturally to algorithmic implementations and
have closure properties along with a related matrix formulation to utilize in
practice. In this thesis, concept of PH-distributions is discussed in Chapter 6.
6. GENERALIZED GAMMA DISTRIBUTION WITH BESSEL FUNCTION: In
Nicy Sebastian [50], a new probability density function associated with
a Bessel function is introduced, which is the generalization of a gamma-type
distribution. Some of its special cases are also mentioned in this thesis. The
author also introduced Multivariate analogue, conditional density, best
predictor function, Bayesian analysis, etc., connected with this new density.
From Nicy Sebastian [50], the probability density function is given as
𝛼𝛽 (𝛿𝑄)𝑘
𝛿 𝑒 −𝛼𝑄 𝑄𝛽−1 ∑∞
𝑘=0 (𝛽) ; 𝛼 > 0, 𝛽, 𝛿 > 0, 𝑄 ≥ 0
𝑓(𝑄) = {𝑒 𝛼 Γ(β) 𝑘 𝑘! (1.15)
0 ; 𝑒𝑙𝑠𝑒 𝑤ℎ𝑒𝑟𝑒
This concept is discussed in chapter 7.
7. EXPONENTIAL ORDER STATISTICS: The ordering decision in each
period is affected by a single setup cost k, a linear variable ordering cost
𝑑1 , 𝑑2 , … , 𝑑𝑛 = 𝑑. In stock level is given as 𝑎1 , … , 𝑎𝑛 = 𝑎 at the beginning of a
period. Let an inventory system whose time to shortage and holding of the
items is considered which is the prime interest. If the experiment with a
single new component at time zero be started and it is replaced upon loss by
a new component and so on which is represented by Exponential Order

18
statistics ∑𝑛𝑖=1 𝑄𝑖 is independent and the key to model when there is joint PDF
is
−𝛼𝛽𝑄
𝛼𝛽 (𝛿𝑄)𝑘
𝑓(𝑄) = 𝛿 𝑒 −𝛼𝑄 𝑄𝛽−1 ∑∞
𝑘=0 (𝛽) ,0 < 𝑄 < ∞ (1.16)
𝑘 𝑘!
𝑒 𝛼 Γ(β)

Suppose 𝑄1:𝑛 , 𝑄2:𝑛 , 𝑄3:𝑛 , … 𝑄𝑛:𝑛 are the order statistics of a random variable of
size n arising from 𝑓(𝑄) along with the distribution of the form
𝑄1:𝑛 , 𝑄2:𝑛 , 𝑄3:𝑛 , … 𝑄𝑛:𝑛 = 𝑑𝑟; 𝑟 = 1,2, … , 𝑛; 𝑄0:𝑛 = 0 (1.17)
Then 𝑑𝑟 will constitute the renewal process. Considering the joint probability
density function of all order to be given by
𝑛
−𝛼𝛽 ∑𝑖=1 𝑄𝑖
(𝑄1 ,… ,𝑄𝑛 ) 𝛼𝛽 (𝛿𝑄)𝑘
𝑓1:2,…,𝑛:𝑛 = 𝑛! 𝑍 𝛿 𝑒 −𝛼𝑄 𝑄𝛽−1 ∑∞
𝑘=0 (𝛽) (1.18)
𝑘 𝑘!
𝑒 𝛼 Γ(β)

Chapter 7 involves the use of these concepts in obtaining the optimal

expected cost.

1.11 ARRANGEMENT OF THE CHAPTERS

In Chapter 1, a brief introduction about operations research, inventory

control and its practical applications to real life problems is studied. The
results of stochastic process using varying demand distribution are applied in
this thesis.
In Chapter 2, a brief summary on research papers published by
various authors is given as the review of literature.
In Chapter 3, Single period Newsboy problem using SCBZ Property is
discussed. The Newsboy problem is discussed assuming that the demand
distribution satisfies SCBZ property. The Newsboy problem is one under the
finite inventory process. In this problem it is assumed that there is a one-time
supply of items and demand is probabilistic. Each unit of items produced but
not sold is called salvage cost and if the supply is less than demand, it
results in stock-out cost. This model has been discussed by Hanssman F
[33]. At the beginning of each period of time the stock level of each item is
reviewed and a decision to order or not to order is made. The cost elements
that affect the ordering decision in each period are salvage cost and stock-
out cost. The costs are charged on the basis of the stock levels at the end of

19
the period. Demand for the item in each period of time is described by a
continuous random variable with a joint density function which is
independently distributed from period to period.
An approximate closed-form solution is developed using a single
stochastic period of demand which is discussed. A Stationary Multi-
commodity inventory problem has been formulated from a single period
inventory model. Also a generalization of Newsboy problem for several
individual source of demand is discussed. It is assumed that the demand has
a probability distribution which satisfies the so called SCBZ property. Such
an assumption is justified since the demand distribution undergoes a change
with the size of the demand. Under this assumption the optimal supply size
is determined and the change in the optimal size consequent to the change
in the parameter involved in the distribution is illustrated numerically.
In Chapter 4, the single period Newsboy problem discussed in
chapter 3 is extended using Truncated Exponential Distribution and Renewal
Reward Theory. In this chapter, a study on the salvage cost undergoing a
change using the Truncated Exponential Distribution and the use of Renewal
Reward Theory for obtaining the solution involving the occurrence of partial
backlogging due to stock-out is carried out. The objective is to derive the
optimal stock level and numerical illustration with corresponding figure is
provided.
In Chapter 5, the Truncated Exponential Distribution discussed in
chapter 4 is used to study the base-stock for patient customer. In the base
stock system the total inventory on hand is to be taken as the sum of the
actual inventory on ground and inventory due to orders for replenishment.
The customers do not cancel the orders if shortage occurs but waits till the
supply is received. The patient customer case is studied, where all unfilled
demand is backlogged. Immediate delivery of orders and complete
backlogging of all unfilled demands is assumed. The optimal expected cost
of base-stock system for patient customer is obtained when the demand
distributions are distributed exponentially before the truncation point and
Erlang2 after the truncation point. The objective is to derive the optimal stock
level and also numerical illustration is provided.

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 So far in chapter 5, the base-stock system for patient customer is
discussed, but in real life there are also customers who are impatient. Hence
in chapter 6, a study on the base-stock system for impatient customer is
carried out.
In Chapter 6, the Base-stock impatient customer using finite-horizon
models is studied. So far the Base-stock for impatient customer leaded to a
discrete case but in this work is extended for a continuous case. Also a way
of optimizing the average cost per day by balancing cost of empty beds
against cost of delay patients is analysed which is discussed. The upper and
lower echelon case of the impatient customer in base-stock policy is
discussed. In this chapter, the base-stock is viewed as the number of initial
inventory facility in stock. Here the demand is considered as the Poisson
fashion i.e., one demand at a time. The probability lead time for a reordered
item corresponds to the service time and its distribution is assumed to be
Erlang type. At the upper echelon is a supplier with a single production
facility which manufactures to order with a fixed production time on a first-
come first-served basis and the numbers of non-identical and independent
retailer is considered at the lower echelon. The objective is to derive the
optimal stock level and numerical illustration is provided.
So far in the above chapter continuous single-period models are
discussed and in chapter 7, the multi-period or the multi-item problems is
studied.
In Chapter 7, the multi-period stochastic model is discussed with two
varying demand models. The m-dimensional convolution method which was
introduced by Hanssman F [33] is used for study of generalisation concept of
the ordering convolution operation. Now in this chapter, the multi-period or
the multi demand case is discussed when 𝜓(𝐶) has the form 𝜓(𝐶) =
∑𝑁
𝑖=1 𝜓𝑖 (𝐶𝑖 ) where each of it is continuous and differentiable. The function

𝜓(𝐶) is the cost charged over a given period of time excluding the ordering
cost and in general it is the holding and shortage costs. Considering the case
when the salvage and stock-out cost for each item is linear. Let for item (𝑖 =
1, 2, 3, … , 𝑁) an inventory model is discussed under the following
assumptions regarding the model.

21
 (i) There is a onetime supply at the start of the period (0, 𝑇).
(ii) The demands occur at 𝑁 𝑡ℎ random epochs in (0, 𝑇) and the
magnitudes of the demands are random variables denoted as 𝑄𝑖 =
1, 2, 3, … 𝑁
(iii) If the cumulative demand ∑ 𝑄𝑖 ≤ 𝑍, then salvage occurs and
if ∑ 𝑄𝑖 > 𝑍, then stock-out occur during (0, 𝑇). The random variable
representing demand namely 𝑄𝑖 has PDF 𝑓(. )and CDF 𝐹(. ). 𝑄1 , 𝑄2 , 𝑄3 , … , 𝑄𝑁
is identically independently distributed random variables. This chapter the
demand and lead time is considered a constant and a random variable. By
assuming exactly 𝑁 𝑡ℎ demand epochs in (0, 𝑇), and using renewal theory the
optimal value of 𝑍̂ is obtained. Another extension discussed in this chapter is
by the assuming that the random variable 𝑄 has a distribution initially but
there a change of distribution after a truncation. The optimal one time supply
during the interval (0, 𝑇) using the generalized gamma distribution with
Bessel’s function and a multi-commodity inventory system with periodic
review operating under a stationary policy using the exponential order
statistics is discussed. The optimal inventory level is determined for the multi-
period demands. Also adequate numerical analysis shows its effectiveness.
The result of this study, especially the properties are hoped to be of
great use in determining the transient and stationery distribution of the stock
level prior to making ordering decision.
In Chapter 8, a brief summary of the results and conclusions drawn
hereby are furnished.

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