HEURISTIC APPROACHES TO DETERMINE BASE-

STOCK LEVELS IN A SERIAL SUPPLY CHAIN WITH A

SINGLE OBJECTIVE AND WITH MULTIPLE
OBJECTIVES

A SEMINAR REPORT

submitted to

APJ ABDUL KALAM TECHNOLOGICAL UNIVERSITY

by

SARATH BABY

in partial fulfillment for the award of the degree

of

BACHELOR OF TECHNOLOGY

in

MECHANICAL ENGINEERING

DEPARTMENT OF MECHANICAL ENGINEERING

MAR ATHANASIUS COLLEGE OF ENGINEERING

KOTHAMANGALAM 686 666,
KERALA, INDIA.

NOVEMBER 2018

1
 HEURISTIC APPROACHES TO DETERMINE BASE-
STOCK LEVELS IN A SERIAL SUPPLY CHAIN WITH A
SINGLE OBJECTIVE AND WITH MULTIPLE
OBJECTIVES

A SEMINAR REPORT

submitted to

APJ ABDUL KALAM TECHNOLOGICAL UNIVERSITY

by

SARATH BABY

in partial fulfillment for the award of the degree

of

BACHELOR OF TECHNOLOGY

in

MECHANICAL ENGINEERING

DEPARTMENT OF MECHANICAL ENGINEERING

MAR ATHANASIUS COLLEGE OF ENGINEERING

KOTHAMANGALAM 686 666,

KERALA, INDIA.

NOVEMBER 2018
2
 ACKNOWLEDGEMENT

First and foremost, I thank Almighty God for bestowing me with his profound grace,
without which this seminar could not have been a success.

I sincerely thank the staff in charge of seminar for most valuable advices and support.

The encouragement given by my seminar guide helped me through the course of seminar.

Finally I express my heartfelt gratitude to my parents and my friends for the mental
support they had offered me and the immense encouragement to the successful completion
of the seminar.

3
 CERTIFICATE

This is to certify that the seminar report entitled “HEURISTIC APPROACHES TO

DETERMINE BASE-STOCK LEVELS IN ASERIAL SUPPLY CHAIN WITH A
SINGLE OBJECTIVE ANDWITH MULTIPLE OBJECTIVES” submitted by
SARATH BABY to the APJ Abdul Kalam Technological University, Kerala in partial
fulfillment for the award of Degree of Bachelor of Technology in Mechanical Engineering
is a bonafide record of the seminar carried out by him during the year 2018-2019.

Dr. Shajan Kuriakose

Professor and Head of Prof. Sabu Kurian
Department of Mechanical Engineering Associate Professor
Department of
Mechanical Engineering

MAR ATHANASIUS COLLEGE OF ENGINEERING

KOTHAMANGALAM 686 666
KERALA, INDIA.

4
 ABSTRACT

This paper deals with the problem of determination of installation base-stock levels
in a serial supply chain. The problem is treated first as a single-objective inventory-cost
optimization problem, and subsequently as a multi-objective optimization problem by
considering two cost components, namely, holding costs and shortage costs. Variants of
genetic algorithms are proposed to determine the best base-stock levels in the single-
objective case. All variants, especially random-key gene-wise genetic algorithm
(RKGGA), show an excellent performance, in terms of convergence to the best base-stock
levels across a variety of supply chain settings, with minimum computational effort.
Heuristics to obtain base-stock levels are proposed, and heuristic solutions are introduced
in the initial population of the RKGGA to expedite the convergence of the genetic search
process. To deal with the multi-objective supply-chain inventory optimization problem, a
simple multi-objective genetic algorithm is proposed to obtain a set of non-dominated
solutions.

5
 CONTENTS

Title Page

ACKNOWLEDGEMENTS............................................................................................i
ABSTRACT....................................................................................................................ii
LIST OF TABLES..........................................................................................................iii
LIST OF FIGURES....................................................................................................... iv
ABBREVIATIONS..........................................................................................................v
NOMENCLATURE .......................................................................................................vi

CHAPTER 1 : INTRODUCTION…………………………………………………... 11

CHAPTER 2 : THE SUPPLY CHAIN MODEL…………………………………... 12

CHAPTER 3 : PROPOSED GENETIC ALGORITHMS

3.1 VARIANT I: BASIC GA …………………………………………... 14

3.2 VARIANT II: GENE-WISE GA …………………………………... 15

3.3 VARIANT III: RANDOM-KEY GA …………………………….... 16

3.4 VARIANT IV: RANDOM-KEY GENE-WISE GA ……………..... 16

CHAPTER 4 : EXPERIMENTAL DESIGN FOR

PERFORMANCE EVALUATION OF GA’S

4.1 RESULTS OF EXPERIMENTAL STUDY………………………….17

4.2 FURTHER PERFORMANCE

ANALYSIS OF ALGORITHMS………………………………….. 20

CHAPTER 5 : MULTI-OBJECTIVE GENETIC ALGORITHM

5.1 THE STEP-BY-STEP PROCEDURE FOR MOGA…………………23

CHAPTER 6 : SUMMARY………………………………………………………….. 25

REFERENCE…………………………………………………………………………. 26

6
 LIST OF TABLES

Table Title Page

1 Different supply chain cost rate and lead time settings ......................................................
18

2 Performance of solution methods ......................................................................................

19

3 Computational effort associated with different solution methods

With the consideration of TSCC-1......................................................................................
21

7
 LIST OF FIGURES

Figure Title Page

1 Expression for TSCC.......................................................................................... 13

2 Expression for TSCC-1...................................................................................... 13

3 Expression for TSCC -2..................................................................................... 13

4 Chromosome representation............................................................................... 14

5 Crossover operator.............................................................................................. 15

6 Random key representation................................................................................ 16

8
 NOMENCLATURE

English Symbols

j Stage index

N Number of members in supply chain

Sj Installation base stock level at stage j

hj Installation inventory holding cost rate at stage j

bj Installation backlog cost rate at stage j

Lj Replenishment lead time at stage j

Rj,t Installation replenishment quantity at stage j

Ij,t Installation inventory at stage j , at the end of time period t

j,t
B Installation backlog at stage j , at the end of time t

j+1,j
TR Transportation cost between j+1 and j

T Total time period over which the TSCC is calculated

Fk Fitness constant

u Random number

9
 ABBREVIATIONS

TSCC Total supply chain cost

GA Genetic algorithm

BGA Basic genetic algorithm

RKGA Random key genetic algorithm

GGA Gene wise genetic algorithm

RKGGA Random key gene wise genetic algorithm

par_pop Parent population

int_pop Intermediate population

THC Total holding cost

TSC Total shortage cost

CS Cost rate setting

LT Lead time setting

MOGA A multi-objective genetic algorithm

MR Mutation rate

CE Computational effort

ANCE Average normalized computational effort

CR Crossover rate

10
 CHAPTER 1

INTRODUCTION

Supply chain management (SCM) is a set of approaches utilized to efficiently integrate

suppliers, manufacturers, warehouses and retailers, so that merchandise is produced and
distributed in right quantities, to the right locations and at the right time. Inventory in a
supply chain can be managed locally through installation stock policies or centrally using
echelon stock policies. Clark and Scarf used a recursive decomposition approach to
determine the optimal policies. The task of deploying a recursive decomposition to
determine or characterize the optimal echelon base-stock policy and to obtain the
associated inventory costs is not an easy task because the problem as well as the solution
technique, in general, is not easy to develop and is computationally hard (Clark, 1960;
Shang and Song, 2003). In the context of managing inventories in supply chains,
simulation is widely applied to study and evaluate the inventory policies. Reasons
attributed to the choice of simulation to analyze supply chain inventory decisions are the
ability of simulation technique for comprehensive modeling and the flexibility to
incorporate uncertainty and supply chain dynamics.

It is observed from the literature that the solution approaches developed to optimize
base-stock levels in supply chain include heuristic algorithms and iterative search
procedures. Determination of base-stock levels in a supply chain for every stage and the
minimization of the total supply chain cost are quite complex and computationally tedious.
Motivated by such observations and findings, the current study aims at developing
efficient simulation-based algorithms (such as genetic algorithms, gas) to determine the
best local base-stock levels in a serial supply chain.

11
 CHAPTER 2

THE SUPPLY CHAIN MODEL

The supply chain model envisaged in the present study is a single-product, four-stage
serial supply chain consisting of a retailer, distributor, manufacturer and supplier. All the
members in the supply chain operate under a periodic-review base-stock policy, where the
review period is unit time (or a day). Order cost is assumed to be zero or negligible. The
retailer faces random customer demand. Lead time for information (or order processing) is
zero or negligible. Processing lead time and transportation lead time are combined
accordingly at each stage and considered together as one component, called installation or
local replenishment lead time for that stage. Base-stock level at every member or
installation in the supply chain takes discrete integer values. All installations have infinite
capacity. The source of supply of raw materials to the most upstream member, namely the
supplier, is assumed to have infinite raw material availability. Even though the
replenishment lead time is assumed to be deterministic, there exists supply uncertainty in
the sense that the customer or any member will be replenished, provided that the
immediate upstream member has sufficient on-hand inventory to meet the replenishment
order quantity; otherwise, a replenishment order is passed to the next upstream member
who in turn will satisfy the demand depending on the on-hand inventory. The
replenishment lead time for any member can vary between the respective replenishment
lead time and the maximum replenishment lead time that corresponds to the sum of all
replenishment lead times from that member up to all its upstream members in the supply
chain.

The supply chain model envisaged in this work is simulated to evaluate the
performance of the supply chain with respect to every base-stock policy (generated
through the various solution approaches considered in this study), with the total supply
chain cost (TSCC) as the measure of performance in the case of single objective supply
chain inventory problem. The supply chain is simulated for random customer demands

12
that are generated from different demand distributions (i.e., Uniform, Normal and Poisson)
for a specified long run length over which the statistic, TSCC, is collected.

TSCC across all members in the supply chain over T (a long run) is given as follows:

Figure 1

The objective is to obtain optimal installation base-stock policy, that minimizes the TSCC.
It is to be noted that in the current study, we consider the installation base-stock levels and
hence we define the total cost function accordingly. Since we allow backlog of unsatisfied
demand at every stage, the last two terms do not influence sj

Figure 2

We term the above TSCC as TSCC-I in this study. For the case where b j exists at every
stage, we have the TSCC, called TSCC-II in this study, as follows:

Figure 3

13
 CHAPTER 3

PROPOSED GENETIC ALGORITHMS

3.1 VARIANT 1 : BASIC GA

Variant I works on a population of solutions or chromosomes(defined in terms of a set

of installation base-stock levels at different stages). The chromo-some length (l) is set
equal to the number of members (N), and a chromosome is represented in the following
manner:

Figure 4

The initial population is created by generating different sets of installation base-stock

levels randomly. An installation base-stock level s j is bounded by upper and lower limits,
i.e. sjUL and sjLL , computed as shown below

sjUL = (maximum demand per unit time at member j) × (maximum possible

replenishment lead time with respect to member j)

sjLL = (minimum demand per unit time at member j) (minimum possible

replenishment lead time with respect to member j)

A set of installation base-stock levels sj are randomly generated within the range [sjUL ;
sJLL] for j = 1 to n, to form a chromosome. Thus n chromosomes are generated, constituting

the parent population, called par_pop. . Chromosomes in par_pop are evaluated through
simulation, and their respective objective function values (TSCC-1 or TSCC-2) are

14
obtained. For the sake of generality, let TSCC k correspond to objective-function value of
chromosome k. Fitness value fk is computed for the kth chromosome by setting, fk = 1/(1 +
TSCCk). Based on fk values, the chromosomes are selected probabilistically (i.e., roulette-
wheel selection) to the mating pool. The size of the mating pool is same as par_pop. A
single-point crossover operator is deployed.

Figure 5

The first two chromosomes in the mating pool are selected for crossover with a crossover
rate (i.e., probability of crossover) CR, by sampling a uniform random number u. These
chromosomes are directly placed in int_pop (an intermediate population), if u is >CR; else
the two chromosomes are subjected to crossover.

Offspring are placed in int_pop. Repeat the possible crossover operation on the rest of
the chromosomes in the mating pool by considering two consecutive chromosomes at a

time.

The mutation operator used in this study is a gene-wise mutation operator, with a gene
representing an installation base-stock level. Genes of offspring in the int_pop are mutated
with a probability of MR.

3.2 VARIANT 2 GENE-WISE GA (GGA)

Variant 2 : Gene-wise GA (GGA) This proposed variant makes use of a new

crossover operator, called gene-wise crossover operator, that makes use of the information
of genes of all chromosomes present in par_pop, and builds an offspring out of those
chromosomes.

15
 Thus the generated offspring inherits four genes from the chromosomes in the
par_pop, based on chromosomes fitness values. Generate offspring in this manner until n
offspring are generated. It is to be noted that in this variant of GA with gene-wise
crossover operator, we do not generate a mating pool nor have we used the crossover rate.
We generate n offspring by constructing each offspring directly from par_pop through
gene-wise crossover operator. But for this mode of generation of offspring, all other steps
of the BGA hold for Variant 2

3.3 VARIANT 3 : RANDOM KEY GA (RKGA)

The genes for chromosomes are represented as random keys (or uniform random
numbers), instead of phenotypes, in RKGA. Random-key representation as a solution
representation was introduced by Bean (1994). A chromosome is represented as random
keys as follows:

Figure 6

where uj is the uniform random number or the random key that stands for the scaled base-
stock level at the jth member in a supply chain. The initial population is created by
generating uniform random numbers in the interval (0, 1), and filling up all the
chromosomes in par_pop. To evaluate the goodness of the chromosomes, chromosomes
are decoded to obtain the installation base-stock levels.

The crossover and mutation operations used in Variant 3 are the same as in the BGA,
but these operators operate on random keys. Every resultant chromosome in int_pop is
then decoded to get the base-stock levels at different stages (or installations). All other
steps in Variant 3 are the same as in BGA.

3.4 VARIANT 4 : RANDOM KEY GENE-WISE GA (RKGGA)

In the proposed RKGGA, random-key chromosome representation and gene-wise

crossover are employed. Thus, this approach is a hybridization of Variant 2 (in terms of
gene-wise crossover) and Variant 3 (in terms of random-key representation). But for these

16
changes, this variant is same the BGA. Note that Variant 4, just like Variant 2, does not
create a mating pool.

CHAPTER 4

EXPERIMENTAL DESIGN FOR PERFORMANCE

EVALUATION OF GA’S

4.1 RESULTS OF EXPERIMENTAL STUDY

A supply-chain setting consists of a cost-rate setting and a lead time setting (see Table
1). For example, the cost-rate setting CS1 and the lead time setting LT1 constitute one
supply chain setting. Two measures of performance, namely TSCC-1 and TSCC-2, are
considered separately. Accordingly, six supply chain settings are studied with respect to
TSCC-1, and six more supply chain settings are studied with the consideration of TSCC-2.
We have considered different holding cost-rates, shortage cost-rates and lead times in
order to check for the robustness of the proposed GAs in terms of their consistent and
good performance across various supply chain settings and scenario.

The run length for the simulation experiment is 1400 days, and each simulation
experiment is replicated 30 times by using 15 pairs of random numbers and antithetic
random numbers to sample customer demand. This method of antithetic sampling is a
commonly used procedure for generating negatively correlated pairs of samples (Deo,
1999). The customer demand is uniformly distributed in the range [20, 60] units per unit
time (i.e., per day). Customer demand is sampled from a uniform distribution because,
given the minimum and maximum values that a random variable can take, the variance is
maximum when the random variable follows the uniform distribution.

17
 Table 1

The measure of performance is observed over a period of 1200 within the run length of
1400 days, by leaving out the first 100 and the last 100 days. At the end of 30 replications,
the mean and standard deviation of the measures of performance are computed. The
supply chain is simulated by initializing the on-hand inventory at the members equal to
their respective base-stock levels. A pilot study for determining the best parameter settings
in the proposed GAs has been carried out, and the best {CR,MR} settings are obtained for
the variants of GA with respect to TSCC-1 and TSCC-2. Having chosen the best
{CR,MR} settings for GAs (in the neighborhood of 0.85 and 0.15 respectively)

Hence, by enumerating all possible combinations of installation base-stock levels at

different installations (with each installation base-stock level bounded by the respective
sjUL and sjLL ), and evaluating every combination through simulation, we obtain the optimal

18
installation base-stock levels at different installations with respect to TSCC-1 and TSCC-2
for every supply chain setting (termed CEn.).

Table 2

The performance of the four variants of GAs is evaluated by considering different

supply chain settings. The base-stock levels and their corresponding mean and standard
deviation of TSCC (over 30 replications), total holding cost (THC), total holding cost as a
percentage of TSCC, total shortage cost (TSC), total shortage cost as a percentage of
TSCC and the percentage deviation of TSCC from the optimal solution for each of the
solution procedures (with respect to every supply chain setting) are obtained and some
sample results are tabulated in Table 2. Optimal solution for every supply chain setting is
obtained through a complete enumeration of the solution space. Note that all the four

19
variants of GAs have performed very well, and are capable of generating near-optimal
base-stock levels in all the supply chain settings, with the average percentage deviation of
TSCC from the respective optimal solution being very small. It is seen from Table 2 that
the percentage THC for CS1 + LT1 is 77.85%, whereas for CS2 + LT1 it is 86.69%, and
for setting CS3 + LT1 it is 88.14%. This holding-cost increase from one cost-rate setting to
another is mainly due to the increase in the shortage cost-rate across different supply chain
settings (see Table 1).

4.2 FURTHER PERFORMANCE ANALYSIS

An important measure to evaluate the performance of the solution procedure is the

computational effort required by an algorithm (expressed in terms of the number of
solutions that an algorithm has enumerated to converge to the best solution). Tables 3 and
4 present the computational effort required by every solution procedure for each of the six
supply chain settings with respect to TSCC-1 and TSCC-2.

To get more insight from the data presented in Tables 3, the computational effort
values are normalized by dividing the computational effort required by every solution
procedure for a supply chain test problem by the minimum computational effort required
for that supply chain test problem. An average normalized computational effort (ANCE) is
calculated for each of the solution procedures. It is evident that the proposed GAs,
especially with the random-key representation and the gene-wise crossover operator,
require less computational effort.

In addition, we have investigated the performance of a local-search technique (based

on the best-move neighborhood local search), and found this search technique requiring a
lot more computational effort than the GAs. All these results are not given here for want of
space

Since the RKGGA exhibits an outstanding performance in determining base-stock

levels with minimum computational effort in the case of both TSCC-1 and TSCC-2, it is
decided to further analyze its performance in order to test for its robustness by considering
different customer demand distributions that have their upper limits unbounded. The
performance of RKGGA is first analyzed with demand following normal distribution. The

20
parameters (mean and standard deviation) of the normal distribution are assumed to be 40
units per unit time and 7 units per unit time respectively.

Table 3

Following the earlier supply chain settings and simulation-based analyses, the
performance of RKGGA is found to be very good in this case as well, in terms of
obtaining near optimal base-stock levels. Next, by assuming the demand to follow Poisson
distribution, with the mean demand rate assumed to be 40 units per unit time, the
performance of RKGGA is evaluated. The performance of RKGGA is found to be very
good in this case as well.

21
 The performance of RKGGA is analyzed with an alternative form of the problem by
assuming random replenishment lead times. In this phase of work we obtain the optimal
base-stock policy in the class of installation base-stock policies by using RKGGA with the
consideration of random replenishment lead times, although the base-stock policy need not
be necessarily be optimal. It is found that the RKGGA is able to converge to the best base-
stock policy in the class of base stock policies with minimal computational effort.

The performance of RKGGA (in these analyses) reinforces the fact that the RKGGA is
very robust, and is not sensitive to distributions, demand variance and alternative forms of
supply chain problems. In all the analyses RKGGA is able to unearth solutions with very
good quality, with the percentage deviation from the optimal solution being very marginal.

22
 CHAPTER 5

MULTI-OBJECTIVE GENETIC ALGORITHM

Most real-life optimization problems involve multiple and conflicting objectives, and
different solutions may produce trade-offs among different objectives. There exist a set of
solutions which are Pareto-optimal, and at least one such solution dominates a solution not
contained in this set of non-dominated solutions. Since a number of solutions can be
Pareto-optimal, the task of multi-objective optimization is to find as many such (trade-off)
non-dominated solutions as possible, and this task is quite complex. The single-objective
problem considered so far (in terms of minimizing the TSCC) aims at finding the best
base-stock levels at various stages in a serial supply chain.

This research setting has served as the motivation to develop a MOGA-SCIP for
generating a set of non-dominated solutions (involving trade-off between total holding
cost and total shortage cost in the supply chain). Many multi-objective GAs have been
developed for optimizing continuous systems, and most existing multi-objective GAs are
quite complicated and they make use of many parameters.

5.1 STEP BY STEP PROCEDURE FOR MOGA

Step 1: Generate 199 solutions with their installation base-stock levels set randomly
between the GAs base-stock level and the upper bound on the respective base-stock level
at every stage; the solution generated by the GA is also considered, and these 200
solutions together constitute the initial set of solutions (i.e., initial population).

Step 2: Evaluate all the chromosomes in the initial population via simulation and obtain
the values of their respective THC and TSC.

Step 3: Form the set of non-dominated solutions out of these chromosomes.

Step 4: Initialize P = 0.10 and T = 1.

23
Step 5: Select one chromosome at random from the non-dominated set of solutions. As for
the second chromosome, sample u. If u 6 P, then choose a chromosome at random from the
non-dominated front; else generate randomly a solution within the respective bounds on
base-stock levels at different stages and compute its THC and TSC.

Step 6: Subject the two chromosomes obtained in Step 5 to gene-wise crossover operation.
Form one offspring by making use of fitness values computed with the consideration of
THC, and form another offspring by making use of the fitness values with the
consideration of TSC.

Step 7: Generate five neighborhood solutions from each of the two offspring.

Step 8: Evaluate the two offspring and the 10 neighborhood solutions by using simulation
and obtain the values of THC and TSC.

Step 9: Form a set of non-dominated solutions, out of the two offspring and 10
neighborhood solutions.

Step 10: Combine the non-dominated set obtained from Step 9 and the current set of non-
dominated solutions to form the net or updated non-dominated set.

Step 11: If T = 100, then go to Step 12; else increment T = T + 1 and return to Step 5.

Step 12: If P = 1.0, go to Step 13; else increment P by 0.10, set T = 1, and return to Step 5.

Step 13: Stop. The final non-dominated set of solutions is the solution set.

24
 CHAPTER 6

SUMMARY

The present work has considered the problem of determination of base-stock levels in
a serial supply chain so as to minimize the TSCC (i.e., TSCC-1 or TSCC-2). Three new
variants of GAs are proposed, namely, GGA, RKGA and RKGGA. The proposed GAs are
evaluated with a variety of supply chain settings, and it is found that the proposed
RKGGA outperforms all other solution procedures. To expedite the convergence of the
genetic search process, problem-specific heuristic solutions are introduced in the initial
population. The performance analysis shows that the convergence of the genetic search
process has improved considerably after introducing the proposed heuristic solutions in the
initial population. More importantly, a multi-objective genetic algorithm has been
proposed to obtain non-dominated solutions in respect of total holding costs and total
shortage costs in a serial supply chain.

25
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