International Journal of Production Research

ISSN: 0020-7543 (Print) 1366-588X (Online) Journal homepage: http://www.tandfonline.com/loi/tprs20

An EOQ model with random disruption and partial

backordering
Hossein Salehi, Ata Allah Taleizadeh & Reza Tavakkoli-Moghaddam
To cite this article: Hossein Salehi, Ata Allah Taleizadeh & Reza Tavakkoli-Moghaddam (2015):
An EOQ model with random disruption and partial backordering, International Journal of
Production Research, DOI: 10.1080/00207543.2015.1110634
To link to this article: http://dx.doi.org/10.1080/00207543.2015.1110634

Published online: 13 Nov 2015.

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Date: 16 November 2015, At: 22:23

International Journal of Production Research, 2015

http://dx.doi.org/10.1080/00207543.2015.1110634

An EOQ model with random disruption and partial backordering

Hossein Salehia, Ata Allah Taleizadehb and Reza Tavakkoli-Moghaddamc*
a

School of Industrial Engineering, South Tehran Branch, Islamic Azad University, Tehran, Iran; bSchool of Industrial Engineering,
College of Engineering, University of Tehran, Tehran, Iran; cSchool of Industrial Engineering and Center of Excellence for
Intelligence Based Experimental Mechanics, College of Engineering, University of Tehran, Tehran, Iran

Downloaded by [Universite Laval] at 22:23 16 November 2015

(Received 5 February 2015; accepted 13 October 2015)

Perfect quality of batches is an assumption in the classic economic order quantity (EOQ) model (of inventory
management); however, in practice some disruptions may occur in a supply chain. This paper presents an EOQ model
with random disruption and partial backorders. So, when shortage occurs (due to quality problems or normal shortages),
some customers are willing to wait for delivery until the next period. There is a nite probability that batches may be
defective so an all or none policy is used after inspection of batches. The optimal inventory cost and the corresponding
decision variables are studied. A solution method is proposed to optimise the inventory cost, and then two numerical
examples and a sensitivity analysis are provided to illustrate the results.
Keywords: inventory; EOQ; partial backordering; shortage; supply disruption

1. Introduction
The rst inventory model is the classic square-root economic order quantity (EOQ) model developed by Harris (1913).
Taft (1918) used a nite production rate and proposed the basic economic production quantity (EPQ) model. Shortage
not being allowed was one of the assumptions of the EOQ relaxed by Zipkin (2000) leading to the development of
models including backorders and lost sales. Montgomery, Bazaraa, and Keswani (1973) developed a model for the basic
EOQ with partial backordering (EOQPBO), while some customers are willing to wait. EOQPBO models have been
extended by some scholars. Pentico and Drake (2009) modelled the EOQPBO and developed a new solution to optimise the cost function. Pentico, Drake, and Toews (2009) extended the study modelled by Pentico and Drake (2009) in
order to propose the EPQPBO model. Pentico, Drake, and Toews (2011) extended their work to allow for the possibility that the percentage of backordered demand increases when production starts again. Pentico and Drake (2011) surveyed deterministic EOQPBO and EPQPBO models. Hsieh and Dye (2012) proposed an extension to the model
presented by Pentico, Drake, and Toews (2011). They solved the same model without differential calculus and presented
a different decision procedure. Taleizadeh, Niaki, and Makui (2012) developed a single-vendor multi-buyers PBO inventory problem with a multi-product multi-chance constraint. In another study, Wee and Wang (2012) proposed an extension to the model presented Pentico, Drake, and Toews (2011), considering an assumption allowing the backordering
rate that increases anytime during the production phase.
Taleizadeh et al. (2012) developed an EOQPBO model with a special sale price. Additionally, Taleizadeh et al.
(2013a) proposed an EOQPBO model with multiple prepayments. Furthermore, Taleizadeh et al. (2013b) considered
an EOQPBO problem under partial delayed payment, in which a fraction of the purchasing cost should be paid at the
beginning of the period and the remaining amount can be paid later. Taleizadeh and Pentico (2013) developed an EOQ
PBO model with a known price increase. Hu, Lim, and Lu (2014) considered a two-level supply chain consisting of a
retailer and a manufacturer with stochastic demands. They studied the optimal ordering policy when the exceed demand
backordered partially. Wee et al. (2014) proposed an EPQPBO model with two backordering costs and developed a
simple solution procedure to optimise decision variables. Taleizadeh (2014) considered an EOQ-PBO model for an
evaporating item with partial consecutive prepayments that were developed with a real case study of a gasoline station.
Taleizadeh and Pentico (2014) developed a model and solution procedure for the EOQPBO with all-unit discounts.
Karimi-Nasab and Wee (2015) developed an EOQPBO model with random replenishment intervals and special sale
offer.

*Corresponding author. Email: tavakoli@ut.ac.ir

2015 Taylor & Francis

H. Salehi et al.

One assumption of the EOQ model is perfect quality of supply process. By relaxing this assumption, many
researchers have studied the EOQ model with disruption (EOQD), where the supply ow is disrupted in some periods
(Parlar and Berkin 1991; Skouri et al. 2014). Skouri et al. (2014) considered the EOQD model with a random defective
supply batch. Also, an all or none policy is used to inspect the received batches. So, all batches are inspected and they
are rejected if any quality problems are found.
In this paper, an EOQ model with PBO at a constant rate is presented with rejection of defective supply batches. A
simple form of imperfect quality is considered where a fraction of all supply deliveries is defective (below quality
standards), and under an all or none inspection policy, these deliveries are rejected. The cost function of our problem
consists of holding, backordering and lost sales. Using these costs, an exact algorithm is proposed to optimise the
model. The rest of the paper is organised as follows. Section 2 introduces the EOQ model with disruption (rejection of
defective supply batches) and PBO (EOQDPBO). The model is optimised in Section 3 and the proof of its optimality
is presented in Section 4. The proposed procedure and numerical examples with the sensitivity analysis to illustrate its
application are given in Sections 5 and 6, respectively. Finally, Section 7 presents conclusions and future research
discussion.

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2. Problem description and formulation

The main notations and the operating assumptions underlying the model are as follows:
2.1 Notations
The following notations are used in order to model the problem.
Parameters
D
Co
Ch
Cb
Cl

p
X
Decision variables
T
T
F

Demand rate
Fixed cost related to place and receive an order
Cost of holding a unit in inventory per unit time
Cost of keeping a backordered unit per unit time (shortage cost)
Cost of losing sale, including the lost prot on the considered unit and any goodwill loss
Fraction of backordering stockouts
Probability of supply batch defectiveness (rejected batches)
Number of consecutive defective deliveries
Time interval between successive supply deliveries
Time interval between two successive acceptable deliveries T 0 X 1T
Rate of lling from stock

2.2 Assumptions
The main assumptions of the presented model are as follows:
(1)
(2)
(3)
(4)
(5)

The planning horizon is innite.

The demand rate is known and constant.
Shortages are allowed and partially backordered.
There is a xed delivery schedule, in which supply batches are delivered at equally spaced delivery intervals T.
The supplier is not totally reliable, having a xed probability to deliver a supply batch that is below quality standards (defective delivery). Defective delivery occurrences are independent of each other.
(6) Each supply batch is inspected upon arrival and, if found defective, the batch is rejected. So, the system operates
under an all or none policy on supply.
(7) There are no emergency deliveries, and the total quantity of any rejected batch is routinely added to the batch
quantity of the next planned delivery.

2.3 Calculating of the total inventory cost

For modelling the expected inventory cost, understanding the system operation over time is needed. In some cases, all
supply deliveries are accepted (i.e. perfect supply quality) (p = 0) and shortages are backordered ( = 1) (i.e. EOQ with

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International Journal of Production Research

Figure 1. Two consecutive cycles of the length in the EOQDPBO.

backordering), or lose all sales if no customers will wait ( = 0) (EOQ with lost sales), and it can be assumed that some
shortages are backordered, others are not (0 < < 1) (EOQ with PBO). On the other hand, in several cases, some batches
are defective (i.e. imperfect supply quality) (p > 0) and the value of below one and the PBO policy is considered.
After the rejection of defective batches, the length of inventory cycles depends on the probability of the defective
batch (p) and is a random variable. The length of any inventory cycle can be shown as T 0 X 1T . Since defective
delivery occurrences are independent (Assumption 5), X (i.e. number of consecutive defective deliveries) is a geometric
random variable with parameter p (Skouri et al. 2014) and probability mass function PX x px 1  p; x  0.
Two different cycles (T = 2T, where a defective delivery at time T has been rejected) are illustrated in Figure 1. The
rejected batch quantity and backordered in time T have been made available in these two cycles.
The problem can be modelled in terms of two decision variables (F, T). So, the cost of system was expressed in
terms of these variables. It is obvious that the inventory-related costs (consists of ordering, holding and shortages costs)
in a cycle of any length, denoted by CC (F, T, X), is a random variable given by:
CCF; T ; X X 1Co

Ch DT 2 F 2 bCb DT 2 1  F 2

Cl DT 1  bX 1  F bCb DT 2 X 1  F
2
2

bCb DT 2 X 2
(1)
2
As dened above, X is a geometric random variable with parameter p; thus,
the expected value and second moment of
p1p
p
p
p2
X given by E X 1p
and E X 2 Var X E X 2 1p

. Therefore, the expected value of

2
1p2
1p2
Equation (1) is given by:

CCF; T





Co
Ch DT 2 F 2 bCb DT 2 1  F 2
1
p
bCb DT 2
 F bCb DT 2 1  F

Cl DT 1  b

1p
1p
1p
2
2
2
p1 p

1  p2
(2)

H. Salehi et al.

Considering the length of any inventory cycle T 0 X 1T , the expected length of each inventory cycle is given by:
E T 0 EX 1T

T
1p

(3)

Therefore, the total cost is given by:

CCF; T
E T0



Co Ch DTF 2 1  p bCb DT 1  F 2 1  p
1

Cl D1  b
 F 1  p bCb DT 1  F p

2
2
1p
T
bCb DT p1 p

(4)

2
1  p

TCF; T

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3. Model optimisation
Using the above cost expression, the aim is now to solve the following constrained two variables optimisation problem.
Minimise TCF; T , subject to 0 F 1.
Taking the partial derivative of TC (F, T) with respect to T and setting it equal to zero gives:
@TC
Co Ch DF 2 1  p bCb D1  F 2 1  p
bCb D p1 p
 2

bCb D1  F p

0
@T
2
2
2
1  p
T
This gives, after some algebra:
s
21  pCo

T F
2
2
2
DCh F 1  p bCb 1  F 1  p2 21  F 1  pbCb p bCb p1 p

(5)

(6)

If p = 0, this equation for T* has the same general form as the equation for T* for the EOQ model with PBO and
has the same general form as the equation for T* for the basic EOQ model if F = 1 and p = 0. Taking the partial derivative of TC (F, T) with respect to F and setting it equal to zero gives:
@TC
Ch DTF 1  p  bCb DT 1  F 1  p  Cl 1  b1  pD  bCb DpT 0
@F

(7)

After some algebra, this results in:

F  T

Cl 1  b1  p bCb T
T 1  pCh bCb

Substituting this expression for F  T into Equation (6) and after some algebra, this results in:
v


u
u1  p 2Co Ch bCb  C 2 D1  b2 1  p
l
t
T
bCb DbCb p Ch pCh

(8)

(9)

4. Proof of the solution optimality

In order to derive the optimal solution, the ideas in Pentico and Drake (2009) are used. So, the cost function in Equation
(4) can be rewritten as:
TCF; T

G0
G3
T G1 F 2  2G2 F  G4 F G2 G4 G4 G5  G3 F
T
1p

(10)

1p
h bCb
b
where G0 Co , G1 D1pC
, G2 D1pbC
, G3 Cl D1  b1  p; G4 pbCb D and G5 21p
. All the
2
2
Gis are positive and TC is rewritten as:

International Journal of Production Research

TCF; T

G0
TrF qF
T

(11)

where,
rF G1 F 2  2G2 F  G4 F G2 G4 G4 G5
qF G3 F

G3
1p

Taking the partial derivative of Equation (11) with respect to T and setting it equal to zero, we have:
s
@TC
G0
G0


 2 rF 0 ! T T F
@T
T
rF

(12)
(13)

(14)

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It should be noted that, this is the same result, with appropriate notation, as given in Equation (6). The discriminant of r
(F) is as follows:
D 2G2 G4 2  4G1 G2 G4 G4 G5
4G22 4G2 G4 G24  4G1 G2 G1 G4 G1 G4 G5

(15)

With the change in the notation, we have:



D bCb D2 1  p2 2bCb D2 p  p2 bCb D2 p2  bCb D2 1  p2 D2 1  p2 bCb Ch




 2D2 1  ppCh bCb bCb  D2 p p2 bCb Ch  bCb D2 p p2
After some algebra, this results in:
D pbCb D2 1 pbCb Ch D2

(16)

Since the discriminant of r(F) is negative, r(F) has no roots. Thus, r(F) is either all positive or all negative. Since
r0 G2 G4 G4 G5 [ 0, rF is strictly positive in [0, 1]. Thus, Equation (14) gives for each F, a unique
T  T  F that minimises the cost function given by Equation (11). Substituting the expression for T  F in Equation
(14) into (11), we have:
^

TC F 2

p
G0 rF qF

(17)

Equation (17) presents the minimum cost for each value of F. Note that the function on the right-hand side of Equation
(17) is continuous, so on the compact interval [0, 1], it has one or more local minimum, the smallest of which will be
the global minimum of the cost function. To nd these minima, take the rst and second derivatives of Equation (17)
with respect to F, yielding:
^

TC0 F
^

00

TC F

p r0F
G0
q0 F
rF1=2

p 00
G0 2r FrF  r0 F2 
2rF3=2

(18)

(19)

It should be noted that, Equation (18) is the same results, with appropriate notation, as given in Equations (7) and
^

(18) is continuous and satises TC0 0\0 (since r0 0 2G2  G4 \0; r0 G2 G4 G4 G5 [ 0, q(0) =
G3 < 0). Moreover, we have:
^

TC0 1

p r0 1
p 2G1  G2  G4
0
G0

q
1

G0 p  G3
G1  G2 G4 G5
r11=2

(20)

With a change in notations, Equation (20) is equivalent to:

^

TC0 1

p D1  pCh  pbCb D
Co q  Cl D1  b1  p
D1pCh
p1p
bCb D 21p
2

(21)

H. Salehi et al.
^

Finally, the second derivative TC0 F given in Equation (19) is positive for all F, and with the change in notation and
after some algebra, it is equal to:
p 

^
Co
TC0 F q pbCb D2 1 pD2 bCb Ch
(22)
3
2 rF
^

So, if TC0 1  0, then TC F has a unique minimum in the open interval (0, 1); otherwise if TC0 1\0 then
TC F is minimum on the boundary point (F = 1).
^

5. Procedure for determining the optimal values

The procedure for determining the optimal values for T and F is as follows:
^

(1) Calculate TC0 1 using Equation (21).

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(2) If TC0 1\0 then go to Step 3; it else, go to Step 4.

(3) Determine F = 1 and substitute it into Equation (6) in order to determine F = 1 in the value of T , calculate the
total cost using Equation (4) and compare that with the cost of losing all demand (ClD). If ClD is less than the
total cost calculated by Equation (4), then the optimal value of decision variables is F  0 and T  1; else,
F  1 and T  should be determined using Equation (6).
(4) Determine T  using Equation (9).
(5) Substitute T* into Equation (8) in order to determine the value of F  .
(6) Calculate the cost function using Equation (4).
A owchart summarising these steps is shown in Figure 2.

Figure 2. Determining the optimal values.

International Journal of Production Research

6. Numerical example and sensitivity analysis

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To illustrate the application of the solution procedure given above, two numerical examples according to the values of
parameters D = 200 units/year, Co = $50/order, Cb = $1/unit/year, Ch = $3/unit/year, Cl = $2/unit lost, p = 0.10 are
provided.
Example 1: For = 0.70.
^
Step 1: Applying Equation (21), we get TC0 1 114:85 [ 0. Then, go to Step 4.
Step 4: Using Equation (9), we have:
v


u
u1  0:1 2503 0:7  1  22  2001  0:72 1  0:1
t
0:76:
T
0:7  1  2000:7  1  0:1 3 0:1  3
10:10:710:76
Step 5: Using Equation (10), we have F  T 210:7
0:42.
0:760:930:71

Step 6: Using Equation (4), we have TC 205:40.
Example 2: For = 0.20
^
Step 1: Applying Equation (22), we get TC0 1 58:38\0. Then, go to Step 3.
Step 3: If all sales are lost, the cost of losing all demand is ClD = 400, Applying Equation (4), the cost is
TC 265:43 (considering F = 1 and substituting it into Equation (6) in order to determine the value of T). Thus, we
have F* = 1, T* = 0.43 and TC* = 265.43.

Table 1. Sensitivity analysis for the rst example.

Optimal values

F*

TC*

271.12
239.24
169.05
129.05

%23
%13
%18
%49

%15
%7
%8
%16

%32
%16
%18
%37

0.58
0.49
0.36
0.31

238.60
223.07
185.99
165.04

%14
%6
%5
%8

%38
%17
%14
%27

%16
%9
%9
%20

0.97
0.87
0.64
0.48

0.38
0.40
0.46
0.55

234.30
220.70
187.55
165.14

%27
%14
%17
%37

%11
%6
%10
%30

%14
%7
%9
%20

%50
%25
%25
%50

0.65
0.70
0.86
1.02

0.51
0.47
0.36
0.29

217.26
211.88
197.29
186.49

%14
%8
%12
%34

%22
%12
%14
%31

%6
%3
%4
%9

Ch

%50
%25
%25
%50

0.76
0.76
0.76
0.76

0.30
0.35
0.53
0.71

218.50
213.06
193.86
174.44

%0.06
%0.04
%0.06
%0.18

%29
%17
%25
%68

%6
%4
%6
%15

%50
%25
%25
%50

0.73
0.74
0.78
0.80

0.45
0.43
0.41
0.40

212.22
208.76
202.15
198.99

%5
%2
%2
%5

%5
%3
%3
%5

%3
%2
%2
%3

%25
%25
%50

0.76
0.70
0.43

0.34
0.55
1.00

167.18
239.05
260.21

%1
%9
%44

%20
%31
%137

%19
%16
%27

Changes

%50
%25
%25
%50

Cl

Changes in
T

Parameters

TC

0.59
0.66
0.90
1.13

0.49
0.45
0.39
0.35

%50
%25
%25
%50

0.65
0.72
0.80
0.82

Co

%50
%25
%25
%50

Cb

H. Salehi et al.

Table 2. Sensitivity analysis for the rst example on D.

Optimal values

D
T
400
800
1600
3200
6400

0.48
0.23
0.15
0.11
0.08

Changes in

TC

0.55
0.92
1.00
1.00
1.00

330.28
519.46
763.60
1569.52
2594.53

%37
%70
%80
%86
%90

F

TC

%30
%117
%137
%137
%137

%61
%153
%272
%664
%1163

Table 3. Sensitivity analysis for the rst example on p.

Optimal values

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T
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9

0.76
0.69
0.62
0.56
0.50
0.43
0.37
0.30
0.20

Changes in

TC

0.42
0.47
0.53
0.61
0.71
0.85
1.00
1.00
1.00

205.40
219.51
235.83
255.26
279.32
310.69
355.17
431.86
603.38

%0
%9
%18
%27
%35
%43
%52
%61
%74

F

TC

%0
%11
%25
%43
%67
%101
%137
%137
%137

%0
%7
%15
%24
%36
%51
%73
%110
%194

Table 4. Sensitivity analysis for the rst example on .

0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0

Optimal values

Changes in

T

F

TC

T

F

TC

0.43
0.43
0.43
0.52
0.68
0.74
0.76
0.76
0.75
0.73

1.00
1.00
1.00
0.81
0.58
0.49
0.42
0.37
0.32
0.28

268.90
265.43
261.95
257.32
243.30
225.32
205.40
184.05
161.40
137.44

%78
%78
%78
%56
%20
%6
%0
%0
%3
%8

%58
%58
%58
%38
%16
%6
%0
%5
%10
%14

%24
%22
%21
%19
%14
%7
%0
%8
%16
%25

6.1 Special case

If we assume that = 1, then Equations (8) and (9) change to the Equations (23) and (24), respectively.
s
2Co 1  pCh Cb
T
Cb DCb p Ch pCh
F  T

Cb
1  pCh Cb

(23)

(24)

Also, if we use D = 4000, Ch = 2, Cb = 8, p = 0.1, Co = 250 (the data-set used by Skouri et al. (2014) for the rst case
q
22500:928
of their investigation, p 0:1  Ch =Ch Cb 2=2 8 0:2), we have T  840000:820:2
= 0.2165, and

International Journal of Production Research

Table 5. Sensitivity analysis for the rst example on Ch .

Optimal values

Ch
T

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1
2
3
4
5
6
7
8
9
10

0.7603
0.7623
0.7630
0.7634
0.7636
0.7637
0.7638
0.7639
0.7640
0.7640

0.92
0.58
0.42
0.33
0.27
0.23
0.20
0.18
0.16
0.15

Changes in
TC

151.98
188.59
205.40
215.06
221.34
225.73
228.99
231.50
233.49
235.11

%0.36
%0.09
%0.00
%0.05
%0.08
%0.09
%0.11
%0.12
%0.13
%0.13

F*
%118
%37
%0
%21
%35
%45
%52
%57
%62
%65

TC
%26
%8
%0
%5
%8
%10
%11
%13
%14
%14

8
F  0:982
= 0.889. So, the backordered quantity is B* = (1 F) DT = (10.8889) 4000 0.2165 = 96.12 and
*
Q = DFT + B = 4000 0.2165 0.889 + 96.12 = 866 that are exactly equal to what Skouri et al. (2014) obtained.
2
h
28
0:2), then we have
Also, if we use p = 0.4 (the second case of their investigation p 0:24 [ ChCC
b
q
2250

0:76
28
*
8
1. So B = (1 F) DT = 0 and Q* = DFT + B = 4000
T  840001:9220:48 = 0.164, and F  0:7682

0.0.164 1 656 that are equal to the obtained results of Skouri et al. (2014).
6.2 Sensitivity analysis
A sensitivity analysis is provided in order to study the impact of changes in parameters on the results of the rst numerical example. Tables 15 indicate a summary of the sensitivity analysis.
From Tables 1 and 2, demand rate (D) changes affect TC ; T  signicantly, with TC increasing as D increases and

T decreasing as D increases. Considering the cost parameters from Table 1, when Cl ; Cb increase, the optimal expected
total cost (TC ) increases, while T  decreases. Also when Ch ; Co increase, both of TC and T  increase. The results of
the sensitivity analysis for cost parameters indicate that changes of Cl and Co have the same effect on TC ; also similar
effects of changes of Ch and Cb on TC are observed. When the probability of supply batch defectiveness (p) increases,
TC increases too and T  decreases (Tables 1 and 3). Table 4 provides more sensitivity analysis on fraction of backordering stockouts () for the rst numerical example. Also in Table 5, the results of the sensitivity analysis respect to
the holding cost are presented.
7. Conclusions
While most studies focused on an inventory model based on the EOQ with perfect quality of deliveries, this study has
proposed an EOQ model with disruption (due to quality problems) and PBO policy (EOQDPBO). The inventory problem has been considered, in which a fraction of all batch deliveries has been defective, and under an all or none
inspection policy, these deliveries are rejected. After modelling the expected cost per unit time, a solution procedure has
been developed for the EOQDPBO problem. Two numerical examples have been provided to illustrate the solution
procedure and sensitivity analysis was performed to study the impacts of changes in parameters on the results. In terms
of future research, it will be interesting to consider an EPQ for this given problem. Furthermore, it is possible to integrate this inventory system in supply chain and distribution network design decisions.
Disclosure statement
No potential conict of interest was reported by the authors.

Funding
This work was supported by the Iran National Science Foundation (INSF) [grant number INSF-94001671].

10

H. Salehi et al.

ORCID
Reza Tavakkoli-Moghaddam

http://orcid.org/0000-0002-6757-926X

Downloaded by [Universite Laval] at 22:23 16 November 2015

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