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Research Paper Related to Inventory

Title of Research Paper: Economic Production Quantity Model for Items with Imperfect
Quality
Authors: M.K. Salameh, M.Y. Jaber, Engineering Management Graduate Program, Faculty of
Engineering and Architecture, American University of Beirut.
Availability of Case Study: This research paper could be found in Int. J. Production
Economics 64 (2000) 59-64.
Objective of Lab:
The main objective of this lab is to get introduced with the fact that the work has been done
on basic EOQ/EPQ models and had been modified accordingly.
Abstract of Research Paper:
The assumptions necessary to justify the use of economic production quantity
(EPQ/EOQ) models are rarely met.
To provide mathematical models that more closely conform to actual inventories and
respond to the factors that contribute to inventory costs, the models must be extended
or altered.
The hypothesis a production/inventory situation where items, received or produced, are
not of perfect quality.
Items of imperfect quality could be used in another production/inventory situation with
less restrictive process and acceptance control.
The extension of traditional EPQ/EOQ model by accounting for imperfect quality items
when using the EPQ/EOQ formulae.
The poor-quality items are sold as a single batch by the end of the 100% screening
process.
Discussion in Paper:
Ever since the EPQ/EOQ (economic production/order quantity) inventory control model was
introduced in the earliest decades of this century, it appears that it is still widely accepted by
many industries today. Regardless of such an acceptance, the analysis for finding an
economic order quantity has several weaknesses. The obvious one is the number of
unrealistic assumptions. This has led many researchers to study the EOQ extensively under
real-life situations. The result was a vast literature on inventory and production models
generalizing the economic order quantity (EOQ) model in numerous directions.
Consider when lot is delivered instantaneously with cost associated with purchasing and
ordering cost. It is assumed that each lot received contains percentage defectives, with a
known probability density function. 100% percent screening process of the lot is conducted.
Items of poor quality are kept in stock and sold prior to receiving the next shipment as a
single batch at a discounted price. The behavior of the inventory level is illustrated in Fig. 1.

Fig. 1: Behavior of Inventory Level over Time

Where: T= cycle length, y= order size, p= percentage of defective items in y, f(p)=
probability density function of p, py = number of defectives withdrawn from inventory, t =
total screening time of y units ordered per cycle
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The mathematical model is derived to the values of y implies that there exists a unique value
y* that maximize and gives:

y
2 KDE [ ]
1
1 p

h[
[ ]
1E [ p ]D (1E
1
1 p
)
]
x
Note that when p=0, in above Equation to get traditional EOQ formulae.

y=
2 KD
h
The behavior of the ratio of modified EPQ/EOQ to the traditional EPQ/EOQ, W, to the increase
in the expected value of the number of imperfect quality items as it could be observer in Fig.
2.

Fig. 2: Behavior of Ratio of Modified to Traditional Model

The behavior of the savings in the expected total profit per unit time of the modified to that of
the traditional EPQ/EOQ model to the increase in the expected value of the number of
imperfect quality items as shown in Fig. 3.

Fig. 3: Behavior of the Saving

The modified EPQ/EOQ model are more recognizable at high values of E[p] which concludes
that the traditional EPQ/EOQ formulae could be used as an estimate for reasonably low
percentage of defectives.
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Summary and conclusion:

Modified inventory model which accounts for imperfect quality items when using the
EPQ/EOQ formulae.
Economic lot size quantity tends to increase as the average percentage of imperfect
quality items increase.
Items of imperfect quality are withdrawn from stock resulting in lower holding cost per
unit per unit time and larger lot sizes.
Additional Information:
To understand his paper the reader must have knowledge of Probability density functions
(PDFs) and exponential random variable as it is based on these two principles which are not
discussed in the paper.
Probability density functions with its formulas is shown in Fig. 4.

Fig. 4: Probability Density Functions

Exponential Random Variable is used for finding the expected values of Fig. 2 and Fig. 3. This
is applicable when parameter >0 for finding E[X] and the other details could be observed in
Fig. 5.

Fig. 5: Exponential Random Variable