41.2 THE DETERMINISTIC CASE: SELECTION OF REPLENISHMENT QUANTITIES IN A FAMILY OF ITEMS. In this section we consider the case where there is a family of coordinated items defined in the following manner. There is a major setup cost (A) associated with a replenishment of the family. In the procurement context this is the fixed (or header) cost of placing an order, independent of the number of distinct items involved in the order. In the production environment this is the changeover cost associated with converting the facility from the production of some other family to production within the family of interest. Then there is a minor setup cost (a) associated with including item din a replenishment of the family. In the procurement context a; is often called the line cost, the cost of adding onc more item or line to the requisition. From a production standpoint a; represents the relatively minor cost of switching to production of item ifrom production of some other item within the same family. In general, we are concerned with items sharing capacity, such as a container on a ship or a piece of production equipment, or with items sharing costs, such asa major fixed ordering cost. For a review of the literature on determinis- tic and probabilistic models see Goyal and Satir (1989), van Eijs (1993b) and Simpson and Erengue (1995). 11.2.1 Assumptions ‘All of the assumptions behind the derivation of the economic order quantity (Sec- tion 5.1 of Chapter 5) are retained, except that now coordination of items is allowed in an effort to reduce setup costs. We recapitulate the assumptions: 1. The demand rate of each item is constant and deterministic (this deterministic assumption will be relaxed in Sections 11.4 to 11.6)? 2, ‘The replenishment quantity of an item need not be an integral number of units (the extension to integral units is as discussed for a single item in Chapter 5). 3. The unit variable cost of any of the items does not depend on the quantity; in particular, there are no discounts in either the unit purchase cost or the unit transportation cost (we will relax this assumption in Section 11.3) ‘Fora related problem of finding groups of raw materials that should be ordered together, see Rosenblatt and Finger (1988); Chakravarty (1984); Rosenblatt and Kaspi (1985); Chakravarty and Martin (1988) van Eijs, Heuts and Kleijnen (1992); and Hong and Hayya (1992). "The sitvation of mevorying but deterministic demand patterns with no capacity constraint (as was the case in Chapter 6) has been analyzed by Kao (1979), and Lambrecht, Vanderveken, and Vander Eecken (1979). In particular, the later presenta heuristic procedure that efficiently determines the timing and sizes of replenishments of the various items involved. See Section 11.62 for the case with a capacity con- scraint.426 COORDINATED REPLENISHMENTS AT A SINGLE STOCKING POINT 4. The replenishment lead time is of zero duration; but the extension to a fixed, known, nonzero duration, independent of the magnitude of the replen- ishment, is straightforward. No shortages are allowed. (Sections 11.4 to 11.6 will deal with the situation where shortages can occur.) 6. The entire order quantity is delivered at the same time. 11.2.2 The Decision Rule In the independent EOQ analysis of Chapter 5 we showed that the EOQ expressed as a time supply was given by 2A Dor Note that Tzog increases as the ratio A/Duincreases. Within our context this indicates that an item i with a high setup cost a, and a low dollar usage rate D,x; should probably be replenished less frequently (higher time supply) than an item j having a low a, and a high Dy,. Because of the assumptions of deterministic demand, no shortages permitted, and instantaneous delivery, it makes sense to include an item in a replenishment only when its inventory drops to the zero level. Therefore, a reasonable type of policy to consider is the use of a time interval (7) between replenishments of the family and a set of m’s where m;, an integer, is the number of T intervals that the replenishment quantity of item é will last. That is, item é will be included in every mth replenishment of the family.’ For example, if m, = 3, item 17 will only be included in every third replenishment of the family, with a replenishment quantity sufficient to last a time interval of duration 87. Each time it will be replenished just as its stock hits the zero level. We wish to select the values of Tand the m’s to keep the total relevant costs as low as possible. Figure 11.1 contains a more detailed example. Items 1 and 3 are ordered every time an order is placed (that is, m, and m, = 1). Item 2 is ordered every other time, so that m = 2 ‘As shown in the appendix of this chapter, the integer ms must be sclected to minimize Teog (4432) mos wl Jackson, Maxwell and Muckstadt (1985) have developed an efficient procedure for the more restrictive Situation where m = 1, 2, 4, 8, etc. (chat is, 2 multiple of two) and T itself is also such a multiple of ‘some basic time period (such asa day or a week). This type of restriction is commonly found in practice. Moreover, Jackson et al. have shown that their solution is, at most, 6 percent more costly than the “optimal” solution to the problem. We do not present the details here since their solution is more difficult conceptually than is ours, See also Roundy (1985); Roundy (1986); Atkins and lyogun (1987); Jackson, Maxwell, and Muckstadt (1988); Zoller (1990); Atkins (1991); Adkins and Sun (1995); and ‘Section 11.4, where we return to the “powersoftwo" solution. Klein and Ventura (1995) present @ simple procedure for finding the optimal cycle times if Tis restricted to take on one of a set of possible discrete values.11.2 THE DETERMINISTIC CASE: SELECTION OF REPLENISHMENT QUANTITIES 427 tte 1 mem tiem 2 ems tem 3 Inventory level Time Figure 11.1. Behavior of Inventory over Time where A= major setup cost for the family, in dollars minor setup cost for item i, in dollars demand rate of item 4, in units/unit time v= unit variable cost of item i, in §/unit n= number ofitems in the family (the items are numbered 1, 2, 3, n-1,) m,= the integer number of Tintervals that the replenishment quantity of item i will last Also, once the best m/s are known, the corresponding value of T'is given by T*(mis) 112 Itis worth noting that r does not appear in Eq. 11.1; that is, the best values of the m’s do not depend on the carrying charge. Goyal (1974) has proposed a search procedure for finding the best set of m/s. See related research by Naddor (1975); Chakravarty (1985b); Bastian (1986); Goyal (1988); Kaspi and Rosenblatt (1991); Goyal and Deshmukh (1993); van Eijs (19982); Hariga (1994); and Viswanathan (1996). We suggest, instead, the use of the following much simpler (noniterative) procedure which is derived in the appendix of this chapter: Srep 1 Number the items such that Dy, is smallest for item 1. Set m = 1 Srep 2 Evaluate mi aie 13 Dy, At a “ rounded to the nearest integer greater than zero.