CEJOR (2009) 17:31–53

DOI 10.1007/s10100-008-0073-z

ORIGINAL PAPER

An EOQ model for perishable products with discounted

selling price and stock dependent demand

S. Panda · S. Saha · M. Basu

Published online: 25 November 2008

© Springer-Verlag 2008

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.

Keywords Inventory · Stock dependent demand · Discounted selling price ·

Deterioration

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

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32 S. Panda et al.

d disposal cost per unit

c per unit purchase cost of the product
Q1 order level for pre- and post deterioration discount on selling price
Q2 order level for only post deterioration discount on selling price
Q3 order level for no discount on selling price
Q4 order level for post deterioration discount on selling price
with instant deterioration
Q 41 order level for no discount on selling price with instant deterioration
Q5 order level for pre-deterioration discount on selling price for
fixed life time product
Q 51 order level for no discount on selling price for fixed life time product
T1 cycle length for pre- and post deterioration discount on selling price
T2 cycle length for only post deterioration discount on selling price
T3 cycle length for no discount on selling price
T4 cycle length for post deterioration discount on selling
price with instant deterioration
T41 cycle length for no discount on selling price with instant deterioration
T5 cycle length for post deterioration discount on selling price for fixed life time
product
T51 cycle length for post deterioration discount on selling price for fixed life time
product
t1 a decision variable representing the time from which pre-deterioration
discount starts

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

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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

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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.

2 Assumptions and notations

A replenishment cycle of an infinite time horizon EOQ type model is developed under
the following notations and assumptions.

1. Replenishment rate is infinite.

2. The deterioration rate is assumed as θ̄ = θ H (t − τ ), where t is the time measured
from the instant arrivals of a fresh replenishment indicating that the deterioration
of the items begins after a time τ from the instant of the arrival in stock. θ is a
constant (0 < θ << 1) and H (t − τ ) is the well known Heaviside’s function
defined as


1, if t ≥ τ
H (t − τ )) =
0, otherwise

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.

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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

At the beginning of the replenishment cycle the inventory level raises to Q 1 . As

time progresses it decreases due to instantaneous stock dependent demand up to the
time τ . After τ deterioration starts and the inventory level decreases for deterioration
and constant demand. Ultimately inventory reaches zero level at T1 . We assume that
before the start of deterioration from time t1 , r1 % discount on unit selling price of the
product is given in order to boost the demand of fresh items. Clearly, this discount is
continued for the period of time (τ − t1 ). As deterioration starts from τ , r2 % discount
on unit selling price is provided to enhance the demand of decreased quality items.
This discount is continued for the rest of the replenishment cycle. Then, the behavior
of inventory level is governed by the following system of linear differential equations

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)

with the initial and boundary conditions I (0) = Q 1 , I (T1 ) = 0.

Solving the equations we get

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

Now, at the point t = τ we have from Eqs. (4) and (5)

 aα a  α1 b(τ −t1 )+bt1 a
(eθ(T1 −τ ) − 1) +
2
Q1 = e − (7)
θ b b

Holding cost and disposal cost of inventories in the cycle is

⎡ ⎤
t1 τ T1
H C + DC = ⎣h I (t)dt + h I (t)dt + (h + θ d) I (t)dt ⎦
0 t1 τ

Purchase cost in the cycle is given by

PC = cQ 1

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36 S. Panda et al.

Total sales revenue in the order cycle can be found as

⎡ t ⎤
1 τ T1
S R = S ⎣ (a + bI (t))dt + α1 (1 − r1 ) (a + bI (t))dt + α2 (1 − r2 ) adt ⎦
0 t1 τ

Thus total profit per unit time of the system is

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)

Our objective here is to determine the optimal values of r1 , r2 , t1 and T1 to maximize

the unit profit function. It is very difficult to derive the results analytically. Thus some
numerical methods must be applied to derive the optimal values of r1 , r2 , t1 and
T1 , hence the unit profit function. There are several methods to cope with constraint
optimization problem numerically. But here we use penalty function method (Deb
2000) to derive the optimal values of the decision variables.

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An EOQ model for perishable products 37

3.2 Some special cases

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

3.2.2 Model for no discount on unit selling price

In this case we consider that there is no pre-deterioration as well as no post deterioration

discount on unit selling price. Substituting t1 = τ and r1 = r2 = 0 we have from
Eq. (7) the initial inventory level as
a a  bτ a
Q3 = (eθ(T3 −τ ) − 1) + e − (13)
θ b b

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

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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 .

3.2.3 Model for instant deterioration

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

Thus, we have to determine r2 and T4 from the maximization problem

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

From Eq. (8) total profit per unit time becomes,


1 a eθ T41 − 1
π41 (T41 ) = SaT41 − (h + θ d) − T41 − cQ 41 − C0 (19)
T41 θ θ

3.2.4 Model for fixed life time products

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

a  α1 b(T5 −t1 )+bt1 

Q5 = e −1 (20)
b

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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

with the restriction T51 ≤ τ .

3.3 Model analysis

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.

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40 S. Panda et al.

Theorem 1 For n 1 = n 2 = n, π1 > π2 if

 
c (S − c − hb )ebτ
r1 < min 1 − ,
S S

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

Therefore, it is sufficient to show that (T P1 − T P2 )/T2 > 0. Now,



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

Thus (T P1 − T P2 )/T2 > 0 if,



1 h
S−c− eα1 b(τ −t1 )+bt1 + S(1 − r2 )
(S − c − hb )ebτ + S(1 − r2 ) − Sb−h
b
b

eα1 b(τ −t1 ) − 1 Sb − h aα2 (T2 − τ ) + a
+ (S(1 − r1 )α1 b − h) − eα1 b(τ −t1 ) > b
bα1 b aα2 (T1 − τ ) + a
b
(26)

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

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An EOQ model for perishable products 41

After simplification we have,

 
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

However, by assumption, r1 < 1 − Sc . Therefore, π1 > π2 if

   
c S − c − hb ebτ
r1 < min 1 − , (28)
S S




Theorem 2 For n 1 = n 2 = n, π2 > π3 if

⎧   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

Therefore, it is sufficient to show that [T P2 − T P3 ]/T3 > 0. If it can be shown that

[T P2 − T P3 ]/T3 > 0 is an increasing function of r2 then our purpose will be served.
Now, differentiating it with respect to r2 we have

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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)

Therefore, [T P2 − T P3 ]/T3 > 0 if ∂(π2 − π3 )/∂r2 > 0, i.e., if

h + θd ebτ − 1 h + θd
S(n − 1)(1 − r2 ) + n + (Sb − h) − cebτ −
θ b θ
n(eθ(T2 −τ ) − 1)
× >0 (29)
θ (T2 − τ )

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)

However, we have the restriction r2 < 1 − c

S
Hence π2 > π3 if
⎧  ⎫
⎨ ebτ −1 bτ ⎬
c S(n − 1) + n (Sb − h) b − ce
r2 < min 1 − , (30)
⎩ S 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) .

A simple managerial indication is as follows: in pure inventory scenario if the product

deteriorates after a certain time then it is always more profitable to apply both pre-
and post deterioration discount on unit selling price. And the amount of percentage

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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. 


Lemma 1 π5 is an increasing function of T5 .

Proof Differentiating π5 partially with respect to T5 we get

∂π5 T5 ∂∂TTP55 − T P5
=
∂ T5 T5 2

Thus, in order to show that π5 is an increasing function of T5 it is sufficient to show

that T5 ∂∂TTP55 − T P5 > 0 After a little simplification we have



∂ 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

+(Sb − h − cb) (31)

(α1 bT5 − 1)eα1 b(T5 −t1 ) + 1

Right hand side of (32) is greater than zero if T5 − 1

a1 b > 0. Since, 0 ≤ r1 ≤ 1,
T5 − 1
a1 b> 0 for all r1 > 0. Hence, T5 ∂∂TTP55 − T P5 > 0 and π5 is an increasing
function of T5 . 


Theorem 4 For fixed r1 > 0 and for any r2 , π1 > π5 if

S(1 − r2 ) − c
T1 < τ + 2
θc + h + θd

Proof From Lemma 1 it is found that π5 is an increasing function of T5 . Thus it is

not possible to obtain optimal T5 within the range 0 ≤ t1 ≤ T5 ≤ τ to determine the
optimal value of π5 . Clearly, π5 attains it’s maximum value at T5 . Now using the same
logic as in Theorem 1 we have

T P1 T P5 |T5 =τ T P1 − T P5 |T5 =τ
π1 − π5 |T5 =τ = − ≥
T1 τ τ

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44 S. Panda et al.

Since τ > 0, it is sufficient to show that T P1 − T P5 |T5 =τ > 0.

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

Now (32) is greater than zero if

 ca α   
eθ(T1 −τ ) − 1 > 0
2
S(1 − r2 )α2 a(T1 − τ ) −
θ
i.e., if



h + θd eθ(T1 −τ ) − 1 h + θd
S(1 − r2 ) + (T1 − τ ) > c+ (33)
θ 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

Hence the theorem. 


From lemma 1 it is found that π5 is an increasing function of T5 . Therefore, π5 attains
it’s maximum value at T5 . Thus, it may be concluded that for time to deteriorating
products to gain higher amount of unit profit replenishment cycle would be continued
up to the start of deterioration and in that case optimal value of T5 cannot be determined.
However, Theorem 4 indicates that if the replenishment cycle length for the case of

both forms of discount, is less than T1 then it provides higher unit profit for any

positive value of r2 . Since, (S(1 − r2 ) − c)/(θ c + (h + θ d)) > 0, T1 is always greater
than τ . Hence it is not desirable to terminate the replenishment cycle before the start
of deterioration, in particular, for time to deteriorating products. From Theorem 4 it
is also found that there is a functional relationship between T1 and r2 and the upper

bound of r2 can be obtained as r2 < 1 − Sc − (T1 −τ2S )(h+θd)
= r2 say. Conversely, it
may be concluded that for any T1 > τ , model with both forms of discount provides

higher unit profit if r2 < r2 .

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An EOQ model for perishable products 45

Theorem 5 For n 1 = n 2 = n, π5 > π51 if

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

Now differentiating (T P5 − T P51 )/T51 with respect to t1 we get,

∂(T P5 − T P51 )/T51 ) aeα1 b(T51 −t1 ) 

= (Sb − h − cb)ebt1 (1 − α1 )
∂t1 bT51
+ α1 (Sb − h) − (Sb(1 − r1 )α1 − h)]

∂(T P5 −T P51 )/T51 )

i.e., ∂t1 > 0 if (Sb − h − cb)ebt1 (1 − α1 ) + α1 (Sb − h) − (Sb(1
− r1 )α1 − h) > 0. Thus ∂(π5∂t−π
1
51 )
> ∂(T P5 −T∂tP1 51 )/T51 ) > 0, if ebt1 > [α1 Sbr1 −
h(α1 − 1)]/[(b(S − c) − h)(α1 − 1)] i.e.,

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 .

3.4 Model for positive terminal inventory level

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.

boundary condition is I (T1 ) = Q 0 . Solving the differential equations we have

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

Substituting t = τ in the Eqs. (36) and (37) we get

 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

And we have the constraint maximization problem

maximize π61 (r1 , r2 , t1 , T1 , Q 0 )

subject to, {r1 , r2 } < 1 − Sc (40)
r1 , r2 , t1 , T1 , Q 0 ≥ 0

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

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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

Theorem 6 For deteriorating item under two-component stock dependent demand

structure non-zero terminal inventory level is profitable if (42) is satisfied.

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).

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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.

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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

Model Nature of r1 r2 t1 Cycle Order Unit profit

discounts length quantity

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.

Table 2 Sensitivity analysis of the model with both types of discounts

Parameter % change % change % change % change % change % change π % change

in r1 in r2 in t1 in T in Q in π

S −40 −85.09 −94.68 −23.87 −11.24 −80.37 90.01 −87.86

−20 −63.49 −84.04 −14.98 −9.86 −77.10 315.90 −57.41
20 15.68 18.14 6.01 14.23 72.95 1984.55 167.55
40 49.22 28.04 9.65 33.16 137.65 2231.48 200.83

c −40 79.56 33.02 36.12 47.37 82.01 3156.81 310.76

−20 56.24 20.52 29.87 26.59 58.13 2361.92 218.41
20 −45.50 −59.23 −2.64 2.01 −68.93 464.48 −37.38
40 −85.09 −94.68 −6.05 15.36 −80.13 351.12 −52.66

h −40 17.19 11.25 83.93 28.22 89.44 945.82 27.50

−20 8.48 6.34 43.65 9.47 39.79 831.49 12.08
20 −7.97 −8.86 −50.75 −5.82 −26.11 676.69 −8.77
40 −14.93 −17.08 −68.22 −10.81 −42.26 627.49 −15.41

d −40 1.36 0.16 0.47 1.15 2.03 747.57 0.41

−20 0.85 0.08 0.21 0.57 0.96 743.22 0.19
20 −0.98 −0.07 −0.27 −0.68 −1.16 740.35 −0.20
40 −2.15 −1.41 −0.51 −1.09 −2.12 738.46 −0.38

θ −40 2.21 0.38 16.56 2.55 3.98 747.79 0.82

−20 0.98 0.29 7.51 1.24 2.12 744.72 0.39
20 −1.08 −0.12 2.98 −1.96 −1.96 738.93 −0.38
40 −1.98 −0.24 −14.89 −3.73 −3.73 736.19 −0.75

a −40 0.0 −0.92 0.11 4.78 −36.73 428.40 −42.43

−20 0.0 −0.56 −0.40 1.80 −18.92 584.97 −21.13
20 0.0 0.32 −0.40 −1.19 18.32 898.70 21.15
40 0.0 0.49 −0.40 −2.07 36.56 1055.69 42.32

b −40 −31.62 −49.13 −16.09 −11.89 −72.33 505.22 −31.66

−20 −19.54 −27.86 −8.23 −5.06 −53.99 586.99 −20.86
20 31.36 6.34 40.23 23.69 79.24 1101.33 48.47
40 56.86 8.91 66.98 41.13 96.86 1962.52 164.57

C0 −40 0.0 0.85 0.0 −2.87 −3.05 756.39 1.97

−20 0.0 0.44 0.0 −1.43 −1.54 750.35 1.15
20 0.0 −0.57 0.0 1.44 1.03 733.31 −1.41
40 0.0 −0.92 0.0 2.85 2.56 724.96 −2.36

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An EOQ model for perishable products 51

Table 3 Optimal values of the decision variables, order quantity and terminal inventory level for example 2

Model r1 r2 t1 Terminal inventory Cycle Order Unit

level length quantity profit

Zero ending inventory 0.58 0.6 0.6386 0 1.7946 1660 2180.34

Positive ending inventory 0.53 0.59 0.5832 255.77 1.6972 1986.19 2281.84

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

0.01 6.96 0.2 37.28 0.01 294.0

0.02 7.7 0.4 20.32 0.3 72.46
0.03 8.43 0.6 14.68 0.05 41.49
0.04 9.16 0.8 11.87 0.1 21.19
0.05 9.9 1.0 10.19 0.2 12.0
0.06 10.63 1.2 9.08 0.3 9.1
0.1 13.56 1.4 8.29 0.4 7.7
0.4 35.55 1.6 7.7 0.5 6.88
0.6 50.21 1.8 7.24 0.6 6.34
0.8 64.87 2.0 6.88 0.8 5.7

discount the inventory depletion rate can be increased, resulting lower amount of
holding cost and deterioration cost, hence higher unit profit.

Example 2 We consider the parameter values same as Example 1 except b, h and τ . It is

assumed that b = 0.4, h = 0.02 and τ = 1.6. The available shelf-space is Q s = 2000.
The optimal values are given in Table 3. It is found from Table 3 that profit for non-zero
terminal inventory level is 2281.84 with order quantity 1986.19 and terminal inventory
level 255.77. The profit is 4.65% higher than unit profit for zero-terminal inventory
level. Note that the unit selling price is 10 and it satisfies the condition (42). But higher
unit profit for non-zero ending inventory level is obtained for sufficiently small value
of h and high values of b and τ . Since, in the decision making context adoptability of
non-zero terminal inventory level is dependent on the unit selling price of the product,
in Table 4 some sensitivity analysis of the unit selling price is performed for different
values of the parameters. Because, if the unit selling price satisfies (42) then it is
always preferable to apply non-zero terminal inventory policy. Table 4 indicates that
when h and τ are moderately high and b is low, extraordinarily high unit selling price
is to be applied to obtain more profit with positive ending inventory policy. Which is
not at all competitive in the decision making context. Thus for very low value of h
and high values of τ and b one may apply a competitive unit selling price and adopt
positive terminal inventory policy. Otherwise, applying a non-realistic unit selling
price we have to adopt non-zero terminal inventory policy. Which is not desirable in
competitive decision making environment.

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52 S. Panda et al.

5 Summary and concluding remarks

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.

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