Professional Documents
Culture Documents
Panda 2009 PDF
Panda 2009 PDF
DOI 10.1007/s10100-008-0073-z
ORIGINAL PAPER
Abstract A single item economic order quantity model is considered in which the
demand is stock dependent. After a certain time the product starts to deteriorate and
due to visualization effect and other aspects of deterioration the demand becomes
constant. In that situation a discount on selling price provides significant increment
in demand rate. In this paper we investigate how much discount on selling price
may be given during deterioration to maximize the profit per unit time and whether
a pre-deterioration discount affects the unit profit or not. A mathematical model is
developed incorporating both pre- and post deterioration discounts on unit selling price,
where analytical results reveal some important characteristics of discount structure. A
numerical example is presented and sensitivity analysis of the model is carried out.
List of symbols
C0 set up cost
S constant selling price of the product per unit
r1 discount offer per unit before deterioration
r2 discount offer per unit after deterioration
h holding cost per unit per unit time
S. Panda (B)
Department of Mathematics, Bengal Institute of Technology,
1.no. Govt. Colony, Kolkata 700150, West Bengal, India
e-mail: shibaji_panda@yahoo.com
S. Saha · M. Basu
Department of Mathematics, University of Kalyani, Kalyani 741235, West Bengal, India
123
32 S. Panda et al.
1 Introduction
Classical economic order quantity (EOQ) model was developed by considering static
demand rate. But demand of physical goods in reality may be stock dependent, time
dependent, price dependent or their combinations. According to Levin et al. (1972)
“at times, the presence of inventory has a motivational effect on people around it. It is
a common belief that large piles of goods displayed in a departmental store leads the
customers to buy more.” It is also investigated by Silver and Peterson (1985) that sales
at retail level tend to be proportional to inventory displayed. To quantify this Baker and
Urban (1988) proposed an EOQ model with power-form inventory level dependent
demand. In the last two decades the variability of inventory level dependent demand
rate on the analysis of inventory system was described by researchers like Pal et al.
(1993), Phelps (1980), Mondal and Phaujdar (1989), Goswami and Choudhuri (1995),
Ritchie and Tsado (1985), Silver (1979), Silver and Meal (1979) and others. They had
described the demand rate as the power function of on hand inventory. Datta and Pal
(1990) investigated an inventory system with two components demand rate where
the consumption of an item is dependent on the instantaneous inventory level until a
given inventory level is reached after which the demand is constant and it reaches zero
level at the end of the cycle. Later Urban (1992) modified the model by relaxing the
zero ending inventory. There is a vast literature on stock dependent inventory and it’s
123
An EOQ model for perishable products 33
outline can be found in the review article by Urban (2005) where he unified two types
of inventory level dependent demand by considering a periodic review model.
Product perishability is an important aspect of inventory control. Deterioration, in
general, may be considered as the result of various effects on stock, some of which
are damage, spoilage, obsoletes, decay, decreasing usefulness and many more. While
kept in store fruits, vegetables, foodstuffs, etc. suffer form depletion by decent spoi-
lage. Through a gradual loss of potential or utility with the passage of time, electronic
goods, grain, radio active substances deteriorate. Gasoline, alcohol etc undergo physi-
cal depletion over time through the process of evaporation. Ghare and Schrader (1963)
were the first proponent of deterioration in inventory literature. They developed EOQ
model for items with exponential decay and deterministic demand. Liu and Shi (1999)
classified perishability and deteriorating inventory models into two major categories,
namely decay models and finite lifetime models. Finite lifetime models assume a
limited lifetime for each item. Blood cells, cans of fruit, foodstuffs, cosmetics, drugs,
etc are examples of the items having fixed lifetimes. Decaying products are of two
types. Products which deteriorate from the very beginning and the products which
start to deteriorate after a certain time. Lot of articles are available in inventory lite-
rature considering deterioration. Interested readers may consult the survey papers of
Nahmias (1982), Raafat (1991) and Goyal and Giri (2001).
Every organization dealing with inventory faces a number of fundamental problems.
Pricing decision is one of them. It has to decide how much to ask for each units and
when to drop the price as the season rolls on. It always wants the price to be marginal,
not so high that it put off potential buyers and not so low that it losses out on potential
profits. Therefore, price can be considered as an important tool to influence demand.
This led many researchers to investigate pricing strategy on inventory models in details
(Arcelus and Srinivasan 1998; Shah and Shah 1993; Wee and Law 2001). Khouja
(2000) studied an inventory problem under the condition that multiple discounts can
be used to sell excess inventory. Dave et al. (1995) investigated a deterministic pro-
duction lot-size model in which demand is a convex function of price and time. The
nature of independent effects of temporary price discounts on inventory policies is
well documented in literature (Weatherford and Bodily 1992; Petruzzi and Dada 1999)
considering various assumptions. Neff (2000) mentioned that discount is considered
as a way of boosting sales. The resulting increase in demand is expected to gene-
rate higher revenues and to accelerate inventory depletion rates with corresponding
decrease in holding cost. Examples of this type of behavior is common among super-
markets, fashion apparel industry, electronic industry, high-tech products, periodicals,
etc. More over question of accelerating the inventory depletion rate is relevant for any
price-sensitive item, but specially so when perishability is a concern because of the
relatively short span of life for gradual deterioration. However, most of the studies
except few, do not attempt to unify the two research streams: temporary price reduc-
tions and deterioration. As a result, the effect of discount for deteriorating items on
revenue has been ignored and the models deal with cost minimization rather than with
profit maximization objective function. Not only that to the best of author’s knowledge,
no one has tried to introduce a temporary discount on selling price before the start of
deterioration as well as a discount on selling price as the deterioration starts to enhance
the demand in order to boost the inventory depletion rate. This paper represents the
123
34 S. Panda et al.
issue in details. The rest of the paper is organized as follows. In Sect. 2 assumptions
and notations are provided for the development of the model. The mathematical model
is developed in Sect. 3. In Sect. 4 a numerical example is presented to illustrate the
development of the model. Finally Sect. 5 deals with summary and some concluding
remarks.
A replenishment cycle of an infinite time horizon EOQ type model is developed under
the following notations and assumptions.
3. Demand depends on the on-hand inventory up to time τ from time of fresh reple-
nishment, beyond which it is constant and defined as follows
a + bI (t), if t < τ
R(I (t)) =
a, if τ ≤ t
where a > 0 is the initial demand rate independent of stock level and condition of
inventory. b > 0 is the stock sensitive demand parameter. I(t) is the instantaneous
inventory level at time t.
4. r2 (0 ≤ r2 ≤ 1) is the percentage discount offer on unit selling price during
deterioration. α2 = (1 − r2 )−n 2 (n 2 R, the set of real numbers), is the effect of
discounted selling price on demand during deterioration. α2 is determined from
priori knowledge of the seller such that the demand rate is influenced with the
reduction rate of selling price. It is obvious that when r2 → 0, α2 → 1, i.e., the
demand of decreased quality items remains same. r1 (0 ≤ r1 ≤ 1) is the per-
centage pre-deterioration discount offer on unit selling price. α1 = (1 − r1 )−n 1 ,
n 1 R is the effect of pre-deterioration discount on demand. If r1 → 0, i.e., for no
pre-deterioration discount the demand is assumed a + bI (t). It is a common phe-
nomenon that demand rate of fresh goods is boosted for discount on selling price
and demand of decreased quality items increases significantly for a discount offer
on selling price. Since the demand rate is enhanced for the discounts offer, there-
fore, it is partially stock dependent and partially stock and selling price dependent
if discounts offer are given. Otherwise, it is two-component stock dependent.
123
An EOQ model for perishable products 35
3 Model formulation
3.1 Formulation of the basic model with pre- and post deterioration discounts on
selling price
d I (t)
= −a − bI (t), 0 ≤ t ≤ t1 (1)
dt
= −α1 (a + bI (t)), t1 ≤ t ≤ τ (2)
= −α2 a − θ I (t), τ ≤ t ≤ T1 (3)
a −bt
I (t) = e − 1 + Q 1 e−bt , 0 ≤ t ≤ t1 (4)
b
a α1 b(t1 −t)−bt1
= e − 1 + Q 1 eα1 b(t1 −t)−bt1 , t1 ≤ t ≤ τ (5)
b
aα2 θ(T1 −t)
= e − 1 , τ ≤ t ≤ T1 (6)
θ
PC = cQ 1
123
36 S. Panda et al.
T P1 1
π1 (r1 , r2 , t1 , T1 ) = = [S R − PC − H C − DC − C0 ]
T1 T1
On integration and simplification of the relevant costs, the total profit per unit time
becomes,
1
π1 = Sat1 + S(1 − r2 )α2 a(T1 − τ )
T1
at1 a 1 − e−bt1
+ (Sb − h) − + Q1 +
b b b
a(t1 − τ ) a −bt1 1 − eα1 b(t1 −τ )
+ [S(1 − r1 )α1 b − h] + Q1 + e
b b bα1
aα2 eθ(T1 −τ ) −1
+ S(1−r1 )α1 a(τ −t1 )−(h + θ d) −(T1 −τ ) − cQ 1 −C0
θ θ
(8)
Note that two discounts r1 and r2 are given on constant unit selling price S of the
product. There may raise another case: the discount on unit selling price of the product
from the start of deterioration may be given on the pre- deterioration discounted selling
price (1 − r1 )S.
The pre-deterioration discount on selling price is to be given in such a way that the
discounted selling price is not less that the unit cost of the product, i.e., S(1−r1 )−c >
0. Similarly, S(1 − r2 ) − c > 0. Applying these constraints on the unit total profit
function we have the following maximization problem
maximize π1 (r1 , r2 , t1 , T1 )
subject to, {r1 , r2 } < 1 − Sc
r1 , r2 , t1 , T1 ≥ 0 (9)
123
An EOQ model for perishable products 37
3.2.1 Model with only post deterioration discount on unit selling price
We now consider the basic model by relaxing the assumption of discounted selling
price from t1 before deterioration. Only discount on selling price will be given as soon
as the deterioration starts. In that case t1 = τ , r1 = 0. From Eq. (7) the initial inventory
level is found as aα a bτ a
2 θ(T2 −τ )
Q2 = (e − 1) + e − (10)
θ b b
Substituting t1 = τ and r1 = 0, we have the unit profit function of the system from
Eq. (8) as
T P2 1
π2 (r2 , T2 ) = = Saτ + S(1 − r2 )α2 a(T2 − τ )
T2 T2
aτ a 1 − e−bτ
+ (Sb − h) − + Q2 +
b b b
aα2 eθ(T2 −τ ) − 1
− (h + θ d) − (T2 − τ ) − cQ 2 − C0 (11)
θ θ
There is only post deterioration discount on selling price. Therefore, we have the
maximization problem
maximize π2 (r2 , T2 )
subject to, r2 < 1 − Sc (12)
r2 , T2 ≥ 0
And from Eq. (8) total profit per unit time becomes,
1 aτ a 1−e−bτ
π3 (T3 ) = Saτ + Sa(T3 −τ ) + (Sb − (h + θ d) − + Q3 +
T3 b b b
a e θ(T3 −τ ) −1
− (h + θ d) − (T3 − τ ) − cQ 3 − C0 (14)
θ θ
123
38 S. Panda et al.
Since, no discount is provided on the unit selling price of the product, no constraint
will be imposed on (14). The only constraint is the nonnegativity restriction for T3 .
If the product starts to deteriorate as soon as it is received in the stock, then there is
no option to provide pre-deterioration discount. Only we may give post deterioration
discount. In that case, τ = t1 = 0 and r1 = 0. Then form Eqs. (7) and (8) the order
quantity and unit profit function for constant demand and post deterioration discount
can be found respectively as
aα2 θ T4
Q4 = (e − 1) (15)
θ
T P4 1 aα2
π4 (r2 , T4 ) = = S(1 − r2 )aT4 α2 − (h + θ d)
T4 T4 θ
θ T4
e −1
× − T4 − cQ 4 − C0 (16)
θ
maximize π4 (r2 , T4 )
subject to, r2 < 1 − Sc (17)
r2 , T4 ≥ 0
Order level and unit profit function for model with instant deterioration and constant
demand with no discount are obtained from (15) and (16) by substituting r2 = 0 as
a θ T41
Q 41 = (e − 1) (18)
θ
If the product has a fixed self life then question of post deterioration discount will not
arise. If T5 be the cycle length then replacing T1 by T5 and for τ → T5 , r2 = 0, Eqs.
(7) and (8) provide the order quantity and unit profit function respectively for fixed
life time product with pre deterioration discount as follows
123
An EOQ model for perishable products 39
and
1 a 1 − e−bt1 at1
π5 (r1 , t1 , T5 ) = Sat1 + (Sb − h) Q5 + −
T5 b b b
+ S(1 − r1 )α1 a(T5 − t1 ) + [S(1 − r1 )α1 b − h]
a(t1 −T5 ) a −bt1 1−eα1 b(t1 −T5 )
× + Q5 + e −cQ 5 −C0 (21)
b b bα1
There is only pre-deterioration discount on selling price and cycle length must be less
than life time of the product, therefore, we have the maximization problem
maximize π5 (r1 , t1 , T5 )
subject to,
c
r1 < 1 − (22)
S
T5 ≤ τ
r1 , T5 ≥ 0 .
Note that this case may be viewed in another perspective instead of considering it for
fixed life time products. The product starts to deteriorate after τ but the replenishment
cycle ends before the start of deterioration. And only pre-deterioration discount is
provided after t1 . Thus it also represents the scenario for time to deterioration products
with the relationship 0 ≤ t1 ≤ T5 ≤ τ .
Profit function and order level for finite life time product with no pre-deterioration
discount can be found from Eqs. (21) and (20), by letting t1 −→ T5 and r1 −→ 0 and
replacing T5 and Q 5 by T51 and Q 51 , respectively as
a bT51
Q 51 = e −1 (23)
b
profit per unit time becomes,
1
π51 (t1 , T51 ) =
T51
aT51 a 1 − e−bT51
× SaT51 + (Sb − h) − + Q 51 + − cQ 51 − C0 (24)
b b b
In last section we have derived all possible unit profit functions arise from the asso-
ciativity of deterioration and discount on unit selling price. In this section, we verify
the applicability of the proposed discount structure. Let us consider the following
theorem.
123
40 S. Panda et al.
Proof The values of π1 and π2 for fixed r1 and r2 are always less than those for optimal
r1 and r2 . Thus it is sufficient to show that π1 > π2 for fixed r1 and r2 . Note that T1
and T2 are cycle lengths for the models with pre- and post deterioration discounts
and only post deterioration discount on unit selling price. Since the pre-deterioration
discount on selling price is additional, demand of fresh items must be enhanced and
hence the inventory depletion rate must increase. Thus, it is obvious that T2 is always
greater than T1 . From Eqs. (8) and (11), we have,
T P1 T P2 T P1 − T P2
π1 − π2 = − ≥
T1 T2 T2
T P1 −T P2 1 a h bτ Sb − h
= − aα2 (T2 −τ ) + S −c− e + s(1 − r2 ) −
T2 T2 b b b
a h α1 b(τ −t1 )+bt1
+ aα2 (T1 − τ ) + S−c− e
b b
eα1 b(τ −t1 ) −1 α1 b(τ −t1 ) Sb − h
+S(1−r2 ) + [S(1−r1 )α1 b − h] −e
bα1 b
h + dθ
+ aα2 (T2 − τ )2 − (T1 − τ )2 (25)
2
But T2 > T1 , therefore, [aα2 (T2 − τ ) + ab ]/[aα2 (T1 − τ ) + ab ] > 1. Thus from (26)
we have
1 h α1 b(τ −t1 )+bt1
S − c − e + S(1 − r2 )
(S − c − hb )ebτ + S(1 − r2 ) − Sb−h b
b
eα1 b(τ −t1 ) − 1 Sb − h
+ (S(1 − r1 )α1 b − h) − eα1 b(τ −t1 ) >1
bα1 b
123
An EOQ model for perishable products 41
S − c − hb ebτ eα1 b(τ −t1 ) − 1
S(1−r1 )α1 b−h > (α1 −1)b(τ −t1 ) (27)
S− b −
h e −1
bα1
But eα1 b(τ −t1 ) > e(α1 −1)b(τ −t1 ) , i.e., [(eα1 b(τ −t1 ) − 1)/(e(α1 −1)b(τ −t1 ) − 1)] > 1.
Therefore, (27) yields,
S − c − hb ebτ h bτ h h
S(1−r1 )α1 b−h > 1 ⇒ S − c − e + − Sr1 >
S− b −
h b b α1b
bα1
S − c − hb ebτ
r1 <
S
c S − c − hb ebτ
r1 < min 1 − , (28)
S S
⎧ bτ −1 ⎫
⎨c S(n − 1) + n (Sb − h) e
b − ce bτ ⎬
r2 < min 1 − ,
⎩ S S(n − 1) ⎭
Proof The value of π2 for fixed r2 is always less than optimal value of r2 . Thus it
is sufficient to show that π2 > π3 for fixed r2 . Here T2 is the cycle length when
post deterioration discount is applied on unit selling price to enhance the demand of
decreased quality items. For the enhancement of demand the inventory depletion rate
will be higher and consequently the cycle time will reduce. T3 is the cycle length when
no discount is applied on selling price. Obviously T3 is greater than T2 . Without loss
of generality let both the profit functions π2 and π3 are positive. Then
T P2 T P3 T P2 − T P3
π2 − π3 = − ≥
T2 T3 T3
123
42 S. Panda et al.
∂(π2 − π3 ) 1 h + θd a(T2 − τ )
= S(n − 1)(1 − r2 ) + n
∂r2 T3 θ (1 − r2 )(n+1)
ebτ − 1 h + θ d an(eθ(T2 −τ ) − 1)
+ (Sb − h) − cebτ −
b θ θ (1 − r2 )(n+1)
eθ(T2 −τ ) −1
Now, θ(T2 −τ ) > 1. Thus from (29) we have,
ebτ − 1
S(n − 1)(1 − r2 ) + n (Sb − h) − cebτ > 0
b
i.e.,
S(n − 1) + n (Sb − h) e b−1 − cebτ
bτ
r2 <
S(n − 1)
Theorem 1 indicates that for same n 1 and n 2 pre- and post deterioration discounts on
unit selling price produce higher profit than that with only post deterioration discount
on unit selling price, if the percentage post
deterioration discount on unit selling
(S−c− hb )ebτ
price is less than min 1 − Sc , S . Whereas, Theorem 2 demonstrates that
only post-deterioration discount on unit selling price is more profitable than profit
corresponding to no discount on selling price if the percentage
post deterioration
bτ −1
S(n−1)+n (Sb−h) e b −ce
bτ
discount on unit selling price is less than min 1 − S,
c
S(n−1) .
123
An EOQ model for perishable products 43
discount must be less than the limit provided in (28) for both pre and post deterioration
discount. The upper limit for the amount of only post deterioration discount on unit
selling price is given in (30).
Theorem 3 For n 1 = n 2 = n = 1, π4 > π41 if r2 < min 1 − Sc , 1 − cn
S(n−1)
Proof Proof of this theorem is very simple. Letting τ −→ 0 in (30) the upper limit
for r2 can be obtained immediately.
∂π5 T5 ∂∂TTP55 − T P5
=
∂ T5 T5 2
∂ T P5 a h
α1 b(T5 −t1 )
T5 − T P5 = [α1 bT5 − 1](e + 1) S(1 − r1 ) − −c
∂ T5 b α1 b
eα1 b(T5 −t1 ) e b−1 (bT5 α1 − 1)
bt1
S(1 − r2 ) − c
T1 < τ + 2
θc + h + θd
T P1 T P5 |T5 =τ T P1 − T P5 |T5 =τ
π1 − π5 |T5 =τ = − ≥
T1 τ τ
123
44 S. Panda et al.
T P1 − T P5 |T5 =τ
h + θ d aα2 b(T1 −τ ) ebt1 − 1 caα2 θ(T1 −τ )
= S−c− (e − 1)ebα1 (τ −T1 ) − (e − 1)
b θ b θ
h + θ d aα2 θ(T1 −τ )
+ S(1 − r1 )α1 − c − (e − 1)(ebα1 (τ −T1 ) − 1)
α1 b θ
(h + θ d)aα2 eθ(T1 −τ ) − 1
+ S(1 − r2 )α2 a(T1 − τ ) − − (T1 − τ ) (32)
θ θ
Since θ is very small, taking first order approximation of the exponential function and
simplifying we have from (33)
S(1 − r2 ) − c T1 − τ
>θ
c+ h+θd
θ
2
Which implies,
S(1 − r2 ) − c
T1 < τ + 2 = T1 , say
θc + h + θd
123
An EOQ model for perishable products 45
1 α1 Sbr1 − h(α1 − 1)
t1 > ln
b [b(S − c) − h](α1 − 1)
Proof Using the same logic as in Lemma 1 and Lemma 2, we find that
T P5 T P51 T P5 − T P51
π5 − π51 = − ≥
T5 T51 T51
1 α1 Sbr1 − h(α1 − 1)
t1 > ln (34)
b [b(S − c) − h](α1 − 1)
Theorem 5 indicates that for fixed life time product pre-deterioration discount on
unit selling price produces higher profit if the time to start discount is bounded above
by the limit provided by (34). However, from (34) it is found that there is a functional
relationship between t1 and r1 . Hence bound on t1 always implies a bound on r1 .
In the previous section we developed the model with both forms of discounts and
several subcases under the assumption that I (T1 ) = 0. That is the terminal inventory
level of the replenishment cycle is zero. Because for deteriorating product it is a
common practice in reality that product is not carried forward to the next replenishment
cycle. But it does not imply that the ending inventory level is zero. Thus, in this section
relaxing the restriction of zero ending inventory level we formulate the model and
verify whether it provides higher profit or not, though the remanning inventory is not
passed to the next replenishment cycle. The governing differential equations remain
same as in Sect. 3.1 with the initial condition except the boundary condition. The
123
46 S. Panda et al.
a −bt
I (t) = e − 1 + Q 1 e−bt , 0 ≤ t ≤ t1 (35)
b
a α1 b(t1 −t)−bt1
= e − 1 + Q 1 eα1 b(t1 −t)−bt1 , t1 ≤ t ≤ τ (36)
b
aα2 θ(T1 −t)
= e − 1 + Q 0 eθ(T1 −t) , τ ≤ t ≤ T1 (37)
θ
aα a a
(eθ(T1 −τ ) − 1) + + Q 0 eθ(T1 −τ ) eα1 b(τ −t1 )+bt1 −
2
Q1 = (38)
θ b b
Proceeding in the same way as in the previous case we have the profit per unit time
π6 (r1 , r2 , t1 , Q 0 , T1 )
1 at1 a 1 − e−bt1
= Sat1 + S(1 − r2 )α2 a(T1 −τ ) + (Sb − h) − + Q1 +
T1 b b b
a(t1 − τ ) a −bt1 1 − eα1 b(t1 −τ )
+ [S(1 − r1 )α1 b − h] + Q1 + e
b b bα1
+ S(1 − r1 )α1 a(τ − t1 ) − (h + θ d)
aα2 eθ(T1 −τ ) − 1 eθ(T1 −τ ) − 1
× − (T1 − τ ) + Q 0 − cQ 1 − C0 (39)
θ θ θ
Note that if Q 0 = 0 then from (39) we get the unit profit function (8). Proceeding in
the same way as in the previous sub section all the sub cases may be derived easily
for non-zero terminal inventory level.
Since the demand of the product is stock dependent, higher volume of inventory
in shelf always results in higher depletion rate. But how much inventory would be
replenished initially for maximum utilization of stock dependent demand structure,
that depends partially on proper amount of end inventory level. Because the product
deteriorates and it is not possible to pass the excess amount of inventory to the next
replenishment cycle. To quantify this, differentiating π6 partially with respect to Q 0
and simplifying we have
123
An EOQ model for perishable products 47
∂π6 1 ebt1 − 1
= (Sb − h) − cebt1 + (s(1 − r1 )bα1 − h)
∂ Q0 T1 b
1 − e−bα1 (τ −t1 ) 1 − e−θ(T −τ ) −bα1 (τ −t1 )
× − (h + dθ ) e (41)
bα1 θ
The unit profit function increases for the increment of terminal inventory level if
∂π6 /∂ Q 0 > 0, i.e., if
ebt1 − 1 h −bα1 (τ −t1 ) h
(Sb − h) − ce + s(1 − r1 ) −
bt1
(1 − e )− + d > 0,
b bα1 θ
i.e., if
1 S − hb + hθ + d
t1 > ln
b S − hb − c
But τ ≥ t1 . Thus
1 S − hb + hθ + d
τ> ln
b S − hb − c
Therefore, π6 increases for the increment of Q 0 if
1 h θ
S > C + bτ c−d + 1 + (ebτ − 1) (42)
e −1 θ b
If condition (42) is not satisfied then unit profit does not increase for the increment
of terminal inventory level. That is unit profit increases as Q 0 decreases and it attains
maximum value when terminal inventory level is zero. Hence we have the following
theorem
Note that if condition (42) is satisfied, then theoretically π6 attains maximum value
for infinite units of terminal inventory. Consequently the amount of order quantity is
infinite. From practical point of view this is quite impossible because shelf-space in
a departmental store is always limited. Hence, finite order quantity always results in
finite terminal inventory level. Thus to obtain a finite optimal profit there must be an
upper bound of Q 0 such that restriction on shelf-space is not violated. Conversely,
depending on the availability of shelf-space the upper limit of Q 0 is to be determined.
If Q s is the available shelf-space then Q 1 ≤ Q s . Using (38) and simplifying we have
a −[α1 b(τ −t1 )+bt1 ] aα2 θ(T1 −τ ) a −θ(T1 −τ )
Q0 ≤ Qs + e − (e − 1) − e
b θ b
= Q 0 , say (43)
Therefore, problem (40) is defined with the additional constraint (43).
123
48 S. Panda et al.
Theorem 6 indicates that non-zero ending inventory is profitable if the selling price
is at least [θ (τ − d) + h]/[θ (ebτ − 1)] + h/b higher than the purchase cost. Except
S, all the parameters involved in the system are uncontrollable in the decision making
context. Thus lower values of θ , h and higher values of τ , b, sometimes may encourage
the decision maker to adopt non zero terminal inventory policy. This is quite justified
because in such situation inventory depletion rate is higher and it is continued for larger
time period before deterioration and volume of holding cost over the replenishment
cycle is low. However, in majority of the literature, related to stock dependent demand
structure for deteriorating items, the terminal inventory level is assumed as zero.
Perhaps, (i) for it’s simplicity for the absence of an additional variable, (ii) in the
immensely competitive and highly informative market it is not possible to fix unit
selling price in almost all the cases to avail the benefit of positive ending inventory
level. Because it is highly sensitive to the uncontrollable system parameters, (iii) even
if, it is possible to fix a competitive unit selling price, the availability of shelf-space
may not lead to apply it for the restriction (43), (iv) as we mentioned above that people
dealing with business generally does not go beyond the common practise of zero ending
inventory, though sometimes it ’s possible to be benefitted. Although assumption of
variable ending inventory level does not require it’s positiveness, still in the decision
making context once the competitive unit selling price is determined, for a given set
of parameter values, the decision maker should verify whether (42) is satisfied or not.
Because for deteriorating items, positive inventory level seldom happens in reality, as
inventory is not carried forward to the next cycle. Thus for the simplicity regarding the
applicability of the model, if (42) is satisfied then only keeping in mind the availability
of shelf-space the decision maker would go for positive terminal inventory level. Under
stock dependent demand to avail the effect of stock sensitivity more, throughout the
replenishment cycle ending inventory level may be assumed as positive. But, if the
demand is constant after a certain time period (as in this model), then positive effect
of stock dependency of demand is further diminished and hence chance of obtaining
higher unit profit than zero ending inventory level is further reduced. In the next section
we consider two numerical examples and perform some quantitative measurements of
this issue specially with Example 2.
4 Numerical example
Example 1 The parameter values are a = 80, b = 0.3, h = 0.6, d = 2.0, S = 10.0,
C0 = 100.0, c = 4.0, θ = 0.03, τ = 1.2, n 1 = n 2 = 2.0. The optimal values
are listed in Table 1. For the set of parameter values and S, the condition (42) is not
satisfied. Thus for all the models terminal inventory levels are zero. For model with
both pre- and post deterioration discounts, the pre-deterioration discount on unit sel-
ling price is 38.9% and discount starts at time t1 = 1.029 and continued to τ =1.2.
Then the product start to deteriorates. During this time in order to enhance inven-
tory depletion rate, 56.4% discount is provided for remaining time of replenishment
cycle. Profit per unit time is 741.77. The optimal order quantity and cycle length
are 1459.4 and 2.3467 respectively. The unit profit and order quantity for only post
deterioration discount are 600.41 and 617.73 less by 23.5 and 136.2%, respectively.
123
An EOQ model for perishable products 49
Table 1 Optimal values of the decision variables, order quantity and profit per unit time of the models
Time to deterioration With all discounts 0.389 0.564 1.029 2.3467 1459.4 741.774
Post deterioration discount – 0.451 – 2.4945 617.728 600.408
No discount – – – 2.7803 301.135 524.407
Instant deterioration Post deterioration discount – 0.071 – 1.6376 155.589 369.121
No discount – – – 1.759 144.497 366.29
Fixed life Pre-deterioration discount 0.389 – 1.028 1.2 375.085 573.327
No discount – – – 1.2 115.55 461.848
The cycle length is 2.4945, 6.3% higher than that for model with both types of dis-
counts. The post deterioration discount in this case is 45.1% and is less than 11.3%
from the model with both types of discounts. Whereas the model with no discount
provides least profit per unit time among it’s class. The results are quite justified and
agree with the model analysis of last section. Though higher amount of percentage
discounts on unit selling price in the form of pre- and post deterioration discounts
for larger periods of time results in lower per unit sales revenue, still it is more pro-
fitable. Because the inventory depletion rate is much higher for discount enhanced
demand resulting lower amount of inventory holding cost and deteriorated items.
Therefore, it is always profitable to apply both forms of discounts on unit selling
price to earn more profit. The results of two subcases, for instant deteriorating items
and products having fixed life time are also given in Table 1. For instant deteriora-
ting products using the same set of data, 7.1% discount is provided on unit selling
price to earn 0.77% more profit than that with no discount. For fixed life time pro-
ducts also, discounted selling price provides 24.14% more profit if 38.9% discount is
given from time 1.028. Note that the upper limits for r1 and r2 as well as for t1 and
cycle lengths found analytically are satisfied by the numerical values found in this
section.
In Table 2 some sensitivity analysis of the model with both types of discounts
is performed by changing the parameter values −40, −20, 20 and 40%, taking one
parameter at a time and keeping the remaining parameters values unchanged. It is
found from Table 2 that the model is highly sensitive for the error in the estimation of
the parameter values S and c. It is moderately sensitive for the change in the parameter
values a, b and h. Low sensitivity if found for the change in parameter values C0 , d
and θ . Sensitivity analysis reveals some common characteristics, e.g., profit increases
as selling price increases. For the decrement of holding cost or unit purchase cost unit
profit increases, and so on. From Table 2 it is found that, if the selling price decreases,
percentage discount of both types as well as the pre-deterioration discount starting
time decreases. Whereas decrement of unit cost leads to the increment of r1 , r2 and t1 .
This is obvious because lower unit selling price always provides less revenue and in
that case maximum profit is achievable if the discounts and t1 are low. Conversely, if
the unit cost is low then by providing more discounts and more time pre-deterioration
123
50 S. Panda et al.
123
An EOQ model for perishable products 51
Table 3 Optimal values of the decision variables, order quantity and terminal inventory level for example 2
Table 4 Least unit selling prices to be applied for profitable positive terminal inventory level for different
parameter values for example 2
h S τ S b S
discount the inventory depletion rate can be increased, resulting lower amount of
holding cost and deterioration cost, hence higher unit profit.
123
52 S. Panda et al.
In this paper an inventory model is developed for products, which start to deteriorate
after a certain time, with two components stock dependent demand. Pre- and post
deterioration discounts are provided on unit selling price of the product. When dis-
counts are provided the demand is partially stock dependent and partially stock and
selling price dependent. The mathematical model is developed allowing pre- and post
deterioration discounts on unit selling price. Then the amount of allowable both form
of discounts and when the pre-deterioration discount should be started to earn more
profit are determined analytically. It is found that, if the amount of discounts are res-
tricted below the limits provided in the section model analysis, then the unit profit is
always higher. It is also derived analytically the upper limit for only post deterioration
discount on unit selling price to earn more revenue than revenue earned for no dis-
count. However, Theorem 1 indicates the upper limit for post deterioration discount
on unit selling price and hence the upper limit for pre-deterioration discount on unit
selling price to earn maximum profit by applying both form of discounts among its
class. Then two subcases are considered for instant deteriorating items and for fixed
life time products. The upper limit of r2 for instant deteriorating products and upper
limit of r1 for fixed life time products are also derived analytically. The model for
non-zero terminal inventory level is also derived. It is found analytically that, if the
unit selling price is higher than the purchase cost by a certain amount then positive
terminal inventory level is profitable. Numerical examples are presented to justify the
claim of model analysis. It is also noted that the model for fixed life time products is
equivalent to the model if the decision maker wishes to terminate the replenishment
cycle before the start of deterioration for time to deterioration products. From nume-
rical example it is found that for exceptionally low value of h and high value of τ and
b non-zero ending inventory level is profitable subject to the shelf-space constraint.
This is rarely found to happen in reality. For normal and high values of the para-
meters zero-terminal inventory level provides higher unit profit. Thus for simplicity
regarding the applicability of the model it is always preferable to adopt zero-terminal
inventory level policy. It is shown analytically that for time to deteriorating products
the replenishment cycle should be continued after τ to achieve higher unit profit.
Temporary price discounts for perishable products to enhance inventory depletion
rate for profit maximization is an area of interesting research, that needs further inves-
tigation. The model proposed here may be extended in several ways. For example, one
may allow shortage and partial backlogging, demand fluctuations, etc.
Acknowledgments Authors are thankful to the anonymous referees for their comments and suggestions
on the earlier versions of the manuscript for the improvement of the paper.
References
Arcelus FJ, Srinivasan G (1998) Ordering policies under one time discount and price sensitive demand. IIE
Trans 30:1057–1064
Baker RC, Urban TL (1988) A deterministic inventory system with an inventory level dependent demand
rate. J Oper Res Soc 39:823–831
123
An EOQ model for perishable products 53
Datta TK, Pal AK (1990) A note on inventory model with inventory level dependent demand rate. J oper
Res Soc 41:971–975
Dave DS, Fitzpatrick KE, Baker JR (1995) An advertising inclusive production lot size model under conti-
nuous discount pricing. Comput Ind Eng 30:147–159
Deb K (2000) Optimization for engineering design. Prentice-Hall of India, New Delhi
Ghare PM, Schrader GF (1963) A model for an exponentially decaying inventory. J Ind Eng 14:238–243
Goswami A, Choudhuri KS (1995) An EOQ model for deteriorating items with linear time dependant
demand rate and shortages under inflation and time discounting. J Oper Res Soc 46(6):771
Goyal SK, Giri BC (2001) Recent trends in modeling of deteriorating inventory. Eur J Oper Res 134:1–16
Khouja M (2000) Optimal ordering, discounting, and pricing in the single-period problem. Int J Prod Econ
65:201–216
Levin RI, McLaughlin CP, Lamone RP, Kottas JF (1972) Productions/operations management contemporary
policy for managing operating systems. McGraw-Hill, New York, p373
Liu L, Shi D (1999) An (s, S) model for inventory with exponential lifetimes and renewal demands. Naval
Res Logist 46:3956
Mondal BN, Phaujdar S (1989) An inventory model for deteriorating items and stockdependent consump-
tion rate. J Oper Res Soc 40(5):483–488
Nahmias P (1982) Perishable inventory theory: a review. Oper Res 30:680–708
Neff J (2000) Trade promotion rises. Advert Age 71:24–28
Pal S, Goswami K, Chaudhuri KS (1993) A deterministic inventory model for deteriorating items with
stock dependent demand rate. J. Prod Econ 32:291–299
Petruzzi NC, Dada M (1999) Pricing and the news vendor problem: a review with extensions. Oper Res
47:183–194
Phelps RI (1980) Optimal inventory role for linear trend in demand with constant replenishment period.
J Oper Res Soc 31(5):439–442
Raafat E (1991) Survey of literature on continuously deteriorating inventory model. J oper Res Soc 42:
27–37
Ritchie E, Tsado A (1985) Stock replenishment quantities for unbounded linear increasing demand: an
interesting consequence of the optimal policy. J oper Res Soc 36(8):737–739
Shah NH, Shah YK (1993) An EOQ Model for Exponentially Decaying Inventory under Temporary Price
Discounts. Cahiers du CERO 35:227–232
Silver EA (1979) A simple inventory replenishment decision rule for a linear trend in demand. J oper Res
Soc 30(1):71–75
Silver EA, Peterson R (1985) Decision system for inventory management and production planning, 2nd
edn. Willy, New York
Silver EA, Meal HC (1979) A simple modification of the EOQ for the case of a varying demand rate. Prod
Invent Manage 10(4):52–56
Urban TL (1992) An inventory model with an inventory level dependent demand rate and relaxing terminal
conditions. J oper Res Soc 43(7):721–724
Urban TL (2005) Inventory models with inventory-level-dependent demand: a comprehensive review and
unifying theory. Eur J Oper Res 162:792–804
Weatherford LR, Bodily SE (1992) A taxonomy and research overview of perishable-asset revenue mana-
gement: yield management, overbooking, and pricing. Oper Res 40:831–844
Wee HM, Law ST (2001) Replenishment and Pricing policy for deteriorating items taking into account the
time-value of money. Int J Prod Econ 71:213–220
123