Optimal Inventory Management

Strategies for Pharmaceutical

Company and Hospital Supply
Chain in a Fuzzy-Stochastic
Environment
A Journal
by : S.Priyan, R.
Uthayakumar

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Health care industries

---crusial role of
pharmaceutical--(significant cost of products,
storage, control, purchasing,
distribution)Pharmaceutical

strategic decision making to achieve

customers service level target at the
minimum supply chain cost
integrated inventory model for
pharmaceutical products in a two-echelon
(hospital & pharmaceutical) supply chain
Considerations :
Pharmaceutical products can be expensive to purchase and distribute, but
shortages of essential medicines, improper use of medicines, and spending
on unnecessary or low-quality medicines also have a high cost-wasted
resources and preventable illness and death.

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PSC (Pharmacautical Supply Chain)

integration of flow and transformation of
medicines and information
product perishability or expiration of
pharmacautical
given changing demand
limited space capacity
customer satisfaction
patient safety
regulations affecting supply

Inventories satisfy demand requirements reliable estimates of the

amounts and timing of demand are essential
(-) unavailability of the raw material, a workers strike or electricity failure, rejection
during inspection, transcribing, human errors in counting, etc., a pharmaceutical
company may not be able to deliver the products which were ordered by the
hospital. As a result, the quantity received by the hospital does not match
the quantity ordered.

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 investigated cost reductions for hospitals by considering the total delivered cost of a
product rather than just the unit cost. This involves quantifying every cost
Norri associated with a product, including the unit cost and costs related to ordering,
s
inventory, distribution, preparation and use, and paperwork

Van developed a simple inventory rule for joint ordering in a university hospital, but they
de ignored capacity constraints
Poel

provided decision support tools that improve operational, tactical, and strategic
decision-making in the pharmaceutical supply chain and inventory management
Kelle under periodic review inventory policy

et.al

addressed three limitations for use of the continuous replenishment model in the
context of healthcare supply systems. The model does not account for limited
Woo human resources or physical storage capacity, CSL which is critical in most hospitals,
s-ley and decisions are based only on costs and do not consider inventory control
activities and restricted capacity.
the greater the potential variability, the greater the need for additional stock to
Some avoid a shortage between deliveries.
resea

rcher lead time was considered as a decision variable by paying additional crash costs
(equipment improvement, information technology, order expedition, or special
shipping and handling) to reduce lead time
writers: integrated productioninventory models for lead time reduction in a singlevendor and single-buyer supply chain

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Priyan and Uthayakumar introduced the concept and developed continuous review
two-echelon pharmaceutical supply chain inventory model with trade credit financing
and controllable lead time under realistic problems in pharmaceutical company and
hospital. Their model is based on the following two major assumptions:
(i) production rate, expiry rate, screening rate, holding cost and selling price are fixed
constant
(ii) the hospitals received quantity is the same as the quantity ordered.

PROBABILITY DISTRIBUTIONS
However, in many cases where there is little or no historical data available to the
inventory decision maker, perhaps due to recent changes in the supply chain
environment, probability distributions may simply not be available, or may not be
easily or accurately estimated. In some more cases, it may not be possible to
collect data on the random variables of interest because of certain system or time
constraints.
FUZZY SET THEORY
Fuzzy set theory provides an alternate, flexible approach to handle such situations
because it allows the model to easily incorporate various experts advice in
developing critical parameter estimates

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FUZZY SETS

representing linguistic concepts such as low, medium,

and high, are employed to define states of a variable. The membership function of a
fuzzy set possess a quantity meaning and may be viewed as a fuzzy number
provided they satisfy certain conditions.
Fuzzy set theory provides an alternate, flexible approach to handle such
situations because it allows the model to easily incorporate various experts
advice in developing critical parameter estimates.
In this research we extend Uthayakumar and Priyans integrated pharmaceutical
supply chain model to reflect the following three facts:
(i) Fuzzify the hospitals expiry rate (dbi) and holding cost (hbi), and the
pharmaceutical companys production rate (Pi), screening rate (rsi), raw
materials holding cost (hwi) and defective raw materials selling price (sdi)
for the ith product as the triangular fuzzy numbers in the total cost
(ii) The hospitals received quantity is uncertain but it is a random variable
following a normal distribution
(iii) The lead time L consists of m mutually independent components.

() The fuzzy model is defuzzified with the signed distance method and the
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For the fuzzy total cost in multi-echelon multi-product multi-constraint

inventory model based on the signed distance method, all pertinent
definitions of fuzzy sets are given below:
Membership
function of
triangular fuzzy

P() = [PL(), PR()] PL()

and PR() are the left and
right hand side of P();
U be the family of all these
fuzzy numbers P on R

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if
0 < a then the distance between a and 0 is d0(a, 0) = a
if a < 0 then the distance between a and 0 is d0(a, 0) = a
Therefore, d0(a, 0) = a is the signed distance between a and 0.

midpoint of the interval [p, r] Mp = (p + r)

i. If Mp > p, then p < q < d(, ) < C() < Mp < r
ii. If Mp < q, then p < Mp < C() < d(, ) < q < r
iii. If Mp = q, then p < Mp = C() = d(, ) = q < r.
The
membership grade of (d(,)) > (d())

Therefore,
from
the
membership
grade
perspective, it is better for us to defuzzify the
fuzzy number by d(, ) than by C() signed
distance > centroid

centroid of C is C() = (1/3)

(p+q+r)
signed distance of is d(, )
=() (2q + p + r)

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ASSUMPTIONS:
1. Single pharmaceutical, a single hospital, multiple (M) pharmaceutical
products
2. Hospital orders a lot size of Qi units pharmaceutical company
produces the products in a lot size of nYi units
3. Certain trade credit period for all products to cooperate with the
hospital in an integrated strategy
4. All ordered raw material is delivered in one shipment to the
pharmaceutical company by outside supplier
5. Hospital uses a continuous review policy and order when its inventory
level falls to the reorder point ri
6. The lead time L consists of m mutually independent components for
all products
7. The i-th products unit production cost, Pci(Yi), is a linear function of
delivered quantity Yi.

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PROPOSED SCENARIO
Hospitals floor space has limited capacity and the target customer service
level (CSL) of the ith product is (1 i). Demand<available stock-out and the
unsatisfied demand at the hospital is completely backordered. The integrated
expected total cost of the pharmaceutical supply chain for all products is

IETC(Q, L, n) =The hospitals expected total cost

ETCh(Q, L) + The companys expected total cost
ETCp(Q, n).

Hospital : ordering cost, inventory, holding cost, product expiry cost,

opportunity interest cost, interest earned, transportation and labor cost for
order handling and receiving, and lead time crashing cost.
Expected quantity received E(Yi|Qi) = iQi, where i is the bias factor (0 i
1, received <= order; i > 1, received <= order). The variance of the quantity
received for the ith product is given by:

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Pharmaceutical :

First lot size of Yi units ready for

shipment after time Yi/Pi just after the
start of the production
During the production period nYi/Pi,
inventory

constant
rate
and
simultaneously supplies a lot of size Yi
units to the hospital on expected every
Yi/Di units of time
During non-production period the
company continues its shipments to the
hospital on expected every Yi/Di units of
time until the ith products inventory level
falls to zero
Pharmaceuticals expected on hand
inventory in the current cycle is
evaluated as the difference of the
Constraints: floor space andcompanys
costumers
service level
accumulated
inventory and
the hospitals accumulated inventory.

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Numerical analysis to highlight the differences between crisp and the fuzzy cases.
Parameters which are used in Uthayakumar and Priyan :
F = Fixed transportation cost for all products per delivery = $100
Fw = Fixed transportation cost for all raw material = $400
tc = Trade credit period for all products offered by the pharmaceutical
company in years = 0.1 year
Id = Interest rate of deposit for all products per year = 0.02
Iv = Interest rate for calculating the pharmaceutical companys
opportunity interest loss due to the delay payment per year = 0.02
Ic = Interest charge to be paid per $ in stock to the bank for all
products per year = 0.06
W = Total space available for the M products = 500 square feet
Mean of defective rates 1, 2 and 3 are 0.2, 0.25 and 0.12
Table 1-3 Other parameters for the hospital and for finished goods and raw
materials for the pharmaceutical company
Table 4 For fuzzy and uncertain quantity received case: some parameters
Table 5 Lead time has three components with data
Table 6 Summarized lead time components information
Table 7 sensitivity analysis with different parameters of tc, both the optimal lotsizes Qi (i = 1, 2, . . . ,M), and the corresponding integrated expected total cost
increase

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Optimal lot sizes

Lead time
Total number of
deliveries
Lagrangian multiplier
Corresponding
integrated expected
total cost

INTEGRATED
EXPECTED TOTAL
FUZZY CASE

INTEGRATED
EXPECTED TOTAL
COST FOR THE CRISP
CASE

Q1 = 63, Q2 = 52, Q3 =
87

Q1 = 74, Q2 = 68, Q3 =
102

L=6

L=6

n = 9 in one production
run

n = 7 in one production
run

= 0.3

= 0.2

(.) = $69342.

IETC(.) = $68513.

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CONCLUSIONS
PROBLE
MS

METHO
DS

PURPOS
ES

Inventory management most challenging activities in healthcare

Decision making is significantly uncertain classical inventory
formula cannot be used

If the there are uncertainties (ex: very large seasonal, variations) :

Fuzzy-stochastic environment, uncertain received quantity and lead L
consists of m mutually independent components
1.Defuzzification (signed distance method) estimate total
cost function
2.Langrangian multiplier approach determine optimal policy
for the model

To offer strategic decisions making to achieve the target CSL of the

hospital at minimum supply chain cost when the system run fuzzy
stochastic environment

The example shows that the uncertainties in the production rate,

screening rate, expiry rate, holding costs and selling price affect the
RESULTS optimal values and that the integrated expected total cost should be
approximately 1.2% higher (in the