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TRANSACTIONS

IN OPERATIONAL

Intl. Trans. in Op. Res. 12 (2005) 83–100 RESEARCH

ﬂuctuating demand and unit purchase cost

Jinn-Tsair Tenga, Maw-Sheng Chernb and Ya-Lan Chanb

a

Department of Marketing and Management Sciences, The William Paterson University of New Jersey, Wayne,

NJ 07470, USA

b

Department of Industrial Engineering and Engineering Management, National Tsing-Hua University, Hsinchu 30043,

Taiwan

E-mail: tengj@wpunj.edu (J.-T. Teng)

Received 16 May 2002; received in revised form 12 March 2003; accepted 5 May 2004

Abstract

The classical economic order quantity (EOQ) model assumes not only a constant demand rate but also a

ﬁxed unit purchasing cost. In today’s time-based competition, the unit cost of a high-tech product declines

signiﬁcantly over its short product life cycle while its demand increases. Therefore, using the classical EOQ

formulation for a high-tech product will cause varying magnitudes of error. In addition, the cost of

purchases as a percentage of sales is often substantial. Consequently, adding the purchasing strategy into

the EOQ model is vital. In this paper, we assume that not only the demand function but also the unit

purchase cost is ﬂuctuating with time. We then provide an easy-to-use algorithm to ﬁnd the optimal

replenishment number and schedule. In a numerical example, we show that the total cost obtained by our

proposed model is 32.4% less expensive than that obtained by the classical EOQ model.

1. Introduction

The classical economic order quantity (EOQ) model assumes not only a constant demand rate but

also a ﬁxed unit purchasing cost. However, as we know, the demand rate remains stable only in

the maturity stage of a product life cycle. Moreover, in time-based competition today, the unit

cost of a high-tech product declines signiﬁcantly over its short product life cycle. For example, the

cost of a personal computer drops almost linearly with time as shown in Lee et al. (2000).

Therefore, using the EOQ formulation in stages other than the maturity stage of a product life

cycle or for a high-tech product with constantly declining cost will cause varying magnitudes of

error. In addition, the cost of purchases as a percentage of sales is often substantial (52% for all

Published by Blackwell Publishing Ltd.

84 J.-T. Teng et al. / Intl. Trans. in Op. Res. 12 (2005) 83–100

industry) as shown in Heizer and Render (2000). Consequently, adding the purchasing strategy

into the EOQ model is vital.

One method of dealing with EOQ models with time-varying demand and cost over a ﬁnite-

planning horizon is the use of discrete Dynamic Programming (e.g., Wagner and Whitin, 1958).

Based on our decades of teaching experience, students do not have any diﬃculty learning the

continuous version of EOQ (or Linear Programming). However, there are many students who

have diﬃculty handling tedious and cumbersome Dynamic Programming (or Integer Program-

ming). As stated in Friedman (1982), ‘‘In particular, Wagner and Whitin use this approach (i.e.,

Dynamic Programming) to formulate a dynamic version of the economic lot size model. Although

this may be a satisfactory approach, it is generally preferable to solve analytically for the optimal

replenishment policy, whenever possible.’’ As a result, for easy understanding and application, we

will solve the EOQ problem here by a continuous version with a simple analytical solution, instead

of using a discrete version of Dynamic Programming.

Another methodology to solve the EOQ models with time-varying demand and cost

over a ﬁnite horizon could be the Optimal Control Theory (e.g., see Sethi and Thompson,

1981). The major assumptions used in EOQ-related articles in Optimal Control Theory are

summarized in Table 1, where M stands for a manufacturer and R for a retailer. It is clear from

Table 1

Summary of related literature in Optimal Control Theory

Author(s) User(s) Demand Purchase (or Backlogging Other factors

production) cost

Desai (1996) 1M and 1R Seasonal and Constant for M, Yes 1 Season duration

linear in price time-varying for R

Eliashberg and 1M and 1R Seasonal and Constant for both No Distribution

Steinberg (1987) linear in price M and R channel

Eliashberg and 2Ms Linear in price Constant for both No Competing

Steinberg (1991) M and R duopolists

Feichtinger and 1M Time-varying and Strictly convex in Yes Convex inventory

Hartl (1985) linear in price production rate cost

Gaimon (1988) 1M Time-varying Time-varying No Capacity

acquisition

Jorgensen (1986) 1M and 1R Linear in price Constant for M, Yes Quadratic

time-varying for R inventory cost

Jorgensen et al. 1M Diﬀusion demand Learning curve No Cost and demand

(1999) learning

Pekelman (1974) 1M Linear in price Strictly convex in No Planning and

production rate forecast horizons

Pekelman (1975) 1M Production rate Strictly convex in No Known price

production rate

Rajan et al. (1992) 1R Time-varying in Constant No Monopolistic

price retailer

Thompson et al. 1M Linear in price Constant No Planning and

(1984) forecast horizons

Present paper 1R Time-varying Time-varying Yes Ordinary retailer;

no control theory

J.-T. Teng et al. / Intl. Trans. in Op. Res. 12 (2005) 83–100 85

Table 1 that most relevant literature in Optimal Control Theory deals with how a monopolistic

manufacturer determines the optimal price policy and production rate over a given planning

horizon. However, how an ordinary (i.e., not monopolistic) retailer decides its EOQ is absent

from the literature in Optimal Control Theory. The main reason seems to be the diﬃculty in

modelling the order quantity for a retailer as an impulsive control in Optimal Control Theory.

In the growth stage of a product life cycle, the demand rate can be approximated well by a

linear form. Consequently, Resh et al. (1976) and Donaldson (1977) established an algorithm to

determine the optimal replenishment number and timing for a linearly increasing demand pattern.

Barbosa and Friedman (1978) then generalized the solutions for various, similar demand models.

Furthermore, Henery (1979) extended the demand to any log-concave demand function.

Following the approach of Donaldson, Dave (1989) developed an exact replenishment policy for

an inventory model with shortages. In contrast to the traditional replenishment policy that does

not start with shortages, Goyal et al. (1992) proposed an alternative that starts with shortages in

every cycle. By using two numerical examples, they suggested that their policy outperforms the

traditional approach. More recently, Teng et al. (1997) investigated various inventory

replenishment models with shortages and mathematically proved that the alternative by Goyal

et al. is, in fact, less expensive to operate than the traditional policy. Hariga and Goyal (1995) then

developed an iterative procedure that is simpler than that of Goyal et al. Teng (1996) proposed a

simple and computationally eﬃcient optimal method in recursive fashion to solve the problem.

In contrast to the traditional EOQ model, we assume that not only the demand function but

also the unit cost is positive and ﬂuctuating with time. As a result, our proposed model is suitable

for any given time horizon in a product life cycle including high-tech products. The proposed

model is developed with shortages. However, we can easily apply it to the case of no shortages

(with shortage cost 5 1).

This paper is structured as follows. In Section 2, we establish the assumptions and notation for

the proposed inventory lot-size models. In Section 3, we prove that the optimal replenishment

schedule not only exists but also is unique. Then we propose a one-dimensional iterative method

to ﬁnd the optimal replenishment schedule. Moreover, we also show that the relevant cost (i.e., the

sum of the ordering, inventory, shortage and purchase costs) is a convex function of the number

of replenishments. Therefore, the search for the optimal number of replenishments is simpliﬁed to

ﬁnd a local minimum. Furthermore, we provide an intuitively accurate estimate for the optimal

number of replenishments, which signiﬁcantly reduces computational complexity in ﬁnding the

optimal replenishment number. In Section 4, we discuss the inﬂuences of both demand and cost

over the length of the replenishment cycle, the economic order quantity and others. Then two

numerical examples are provided to illustrate the theoretical results in Section 5. Finally, we make

a summary and provide some suggestions for future research in the last section.

The mathematical model of the inventory replenishment problem here is based on the following

assumptions:

(a) Lead time is zero.

(b) Shortages are allowed and backlogged.

86 J.-T. Teng et al. / Intl. Trans. in Op. Res. 12 (2005) 83–100

(c) The initial inventory level is zero.

(d) The inventory charge is based on per unit per unit time.

Note that the authors visited a high-tech e-warehouse in Taiwan and learned that the

e-warehouse charged customers based on either the total sales per month (i.e., inventory

charge is related to its value) or the average rented boxes per month (i.e., inventory charge is

related to its size). Similar to the traditional EOQ model, we assume here that the inventory

charge is related to its size. In a second paper, we will deal with the inventory charge related to its

value.

In addition, the following notation is used throughout this paper.

f(t) 5 demand rate at time t; we assume without loss of generality that f(t) is greater than zero in

(0, H] and continuous in the planning horizon [0, H].

c(t) 5 purchase cost per unit at time t; we assume that c(t) is greater than zero and diﬀerentiable.

co 5 ordering cost per order.

ch 5 inventory holding cost per unit per unit time.

cs 5 shortage cost per unit per unit time.

n 5 total number of replenishments over [0, H] (a decision variable).

ti 5 ith replenishment time (a decision variable), i 5 1, 2, . . . , n.

si 5 time at which the inventory level reaches zero in the ith replenishment cycle (a decision

variable), i 5 1, 2, . . . , n, with ti )si )tiþ1 .

LIi 5 length of the in-stock (or inventory) period in the ith replenishment cycle 5 si ti, i 5 1, 2,

. . . , n.

LSi 5 length of the out-of-stock (or shortage) period in the ith cycle 5 ti11 si, i 5 0, 1, . . . , n 1.

LCi 5 length of the ith replenishment cycle 5 ti11 ti 5 LIi1LSi, i 5 1, 2, . . . , n 1.

ILi 5 inventory level at time ti, i 5 1, 2, . . . , n.

SLi 5 shortage level on backorder prior to ti11, i 5 0, 1, . . . , n 1.

OQi 5 economic order quantity at ti in the ith cycle 5 ILi 1 SLi 1, i 5 1, 2, . . . , n.

The ith replenishment is made at time ti. The quantity received at ti is used partly to

meet the accumulated shortages in the previous cycle from time si 1 to ti (si 14ti). The inventory

at ti gradually reduces to zero at si (siXti). Then the accumulated shortages increase

until the i11th replenishment at ti11 (si4ti11). The decision maker wishes to know how

many orders to place, when to place the orders and how much to order each time so that

the total relevant cost (which is the sum of the ordering, holding, shortage and purchase costs)

over a ﬁnite time horizon [0, H] is minimized. Based on whether the inventory is permitted

to start and/or end with shortages, we have four possible models, which were introduced in

Teng et al. (1997). To ensure no lost sales, the inventory model proposed here is depicted

graphically in Fig. 1.

J.-T. Teng et al. / Intl. Trans. in Op. Res. 12 (2005) 83–100 87

Inventory

level

Time

s0 =0 t1 s1 t2 s2 t3 ... tn−1sn−1 tn sn =H

The total relevant cost associated with this inventory model is established as follows:

n Z si

X n Z ti

X

Wðn; fsi g; fti gÞ ¼nco þ ch ðt ti Þf ðtÞ dt þ cs ðti tÞf ðtÞ dt

i¼1 ti i¼1 si1

Z ð1Þ

X

n si

þ cðti Þ f ðtÞ dt;

i¼1 si1

where the ﬁrst term is the ordering costs, the second term is the inventory holding costs, the third

term is the shortage costs, and the last term is the purchase costs. Thus, the problem here is to ﬁnd

an integer n and a vector of 2n components < t1 ; s1 ; t2 ; . . . ; tn ; sn> such that the total relevant cost

Wðn; fsi g; fti gÞ in (1) is minimized.

For any ﬁxed n, the necessary conditions for Wðn; fsi g; fti gÞ to be minimized are as follows:

@Wðn; fsi g; fti gÞ=@si ¼ 0 and @Wðn; fsi g; fti gÞ=@ti ¼ 0, i 5 1, 2, . . . , n.

Consequently, we have

cðtiþ1 Þ þ cs ðtiþ1 si Þ ¼ cðti Þ þ ch ðsi ti Þ; i ¼ 1; 2; . . . ; n; ð2Þ

and

Z si Z ti

0 0

½ch c ðti Þ f ðtÞ dt ¼ ½cs þ c ðti Þ f ðtÞ dt i ¼ 1; 2; . . . ; n: ð3Þ

ti si1

Note that 0 denotes the ﬁrst derivative with respect to time throughout the paper.

Theorem 1.

(a) If ch )c0 ðtÞ for all t, then n 5 1 and t1 5 0.

(b) If c0 ðtÞ) cs for all t, then n 5 1 and t1 5 H.

88 J.-T. Teng et al. / Intl. Trans. in Op. Res. 12 (2005) 83–100

(c) If ch > c ðtÞ > cs for all t and t1 is unique, then the solution to (2) and (3) is also unique.

0

(d) If ch > c0 ðtÞ > cs for all t, f(t) is log-concave and c(t) is linear, then the solution to (2) and (3)

not only exists but is also unique (i.e., the optimal values of {si } and {ti } are uniquely determined).

The results in (a) and (b) of Theorem 1 can be interpreted as follows. For (a), the condition

c0 ðtÞ*ch > 0 means that the increasing rate of unit purchase cost is higher than or equal to the

inventory holding cost. Therefore, buying and storing a unit now is less expensive than buying it

later. Using a similar argument for (b), if c0 ðtÞ) cs , then c0 ðtÞ*cs > 0 which implies that the

declining rate of unit purchase cost is larger than or equal to the shortage cost. Consequently,

delaying the purchase until the end of the planning horizon H is cheaper than buying it earlier.

Note that neither of these two cases happens in the real world.

Although we proved that the solution to (2) and (3) exists uniquely only under the

conditions that f(t) is log-concave and c(t) is linear, we ﬁnd that for a variety of continuous

functions of f(t) and c(t), the solution to (2) and (3) still seems to be unique. For example,

see Example 1 in Section 5 below. Consequently, for generality, we assume from now on

that f(t) and c(t) are positive continuous functions such that the solution to (2) and (3) is

unique. In fact, Teng and Yang (2004) proved that if f(t) and c(t) are positive continuous

functions, then the solution to (2) and (3) is unique for a more general EOQ model. Their paper

extends the model to allow for a constant deterioration rate and a partial backlogging rate related

to the waiting time. Their model applies to deteriorating items. It does not consider the important

case of non-deteriorating items. Modiﬁcations to take account of this are developed in Theorems

3–5 below.

Note that equations (2) and (3) are also the necessary and suﬃcient conditions for ﬁnding the

absolute minimum Wðn; fsi g; fti gÞ, if the solution to (2) and (3) is unique. From (2), we know that

the optimal value of si (i.e., si ) is the interior point between ti and ti11 because if si 5 ti or ti11, then

equation (2) does not hold. Wðn; fsi g; fti gÞ is a continuous (and diﬀerentiable) function

minimized over the compact set [0, H]2n. Hence, there exists an absolute minimum. The optimal

value of ti (i.e., ti ) cannot be on the boundary since Wðn; fsi g; fti gÞ increases when any one of the

ti s is shifted to the end points 0 or H. Consequently, if the solution to (2) and (3) is unique, then

(2) and (3) are the necessary and suﬃcient conditions for the absolute minimum.

The result in (c) or (d) of Theorem 1 reduces the 2n-dimensional problem of ﬁnding

{si } and {ti } to a one-dimensional problem. Since s0 5 0, we only need to ﬁnd t1 to generate

s1 by (3), t2 by (2) and then the rest of {si } and {ti } uniquely by repeatedly using (3) and (2). For

any chosen t1 , if sn ¼ H, then t1 is chosen correctly. Otherwise, we can easily ﬁnd the optimal t1 by

standard search techniques. For any given value of n, the solution procedure for ﬁnding {si } and

{ti } can be obtained by the algorithm in Yang et al. (2001) with L 5 0 and U 5 H/n.

Next, we show that the total relevant cost Wðn; fsi g; fti gÞ is a convex function of the number of

replenishments. As a result, the search for the optimal replenishment number, n, is reduced to

ﬁnd a local minimum. For simplicity, let

J.-T. Teng et al. / Intl. Trans. in Op. Res. 12 (2005) 83–100 89

By applying Bellman’s (1957) principle of optimality, we have the following theorem:

Theorem 2. If ch > c0 ðtÞ > cs for all t, then W(n) is convex in n.

Proof. Use the same argument as in the proof of Theorem 2 of Teng et al. (1999). &

Now, we establish an estimate of the optimal number of replenishments, n. If c(t) is linear, then

c(t) 5 a bt, where a40 and ch4 b4 cs. Consequently, c(ti) 5 c(t)1b(t ti). Hence, we can

simplify the total relevant cost in (1) as follows.

n Z

X si n Z

X ti

Wðn; fsi g; fti gÞ ¼ nco þ ðch þ bÞ ðt ti Þf ðtÞ dt þ ðcs bÞ ðti tÞf ðtÞ dt

i¼1 ti i¼1 si1

ð5Þ

Z H

þ cðtÞf ðtÞ dt:

0

Using the similar estimate of the optimal number of replenishments as in Teng (1996), we propose

an estimate as

1=2

ðch þ bÞðcs bÞQðHÞH

n1 ¼ rounded integer of ; ð6Þ

2co ðch þ cs Þ

where Q(H) is the cumulative demand over the time interval [0, H]. Note that the result in (6) is a

generalization of the corresponding result in Teng (1994, 1996), in which the purchase cost per unit is

constant and the demand rate is linear. If c(t) is not linear, then we simply use b [c(0) – c(H)]/H in (6)

to estimate n. It is obvious that searching for the optimal number of replenishments by starting with n1

in (6) instead of n 5 1 will reduce the computational complexity signiﬁcantly. The algorithm for

determining the optimal number of replenishments n and the optimal timing {ti } and {si } can be

obtained by the algorithm in Teng et al. (1997) with n1 in (6).

In this section, we discuss the inﬂuences of both demand and unit cost over the following events:

(1) the length of the in-stock period (i.e., LIi 5 si ti), (2) the length of the out-of-stock period

(i.e., LSi 5 ti11 si), (3) the length of the replenishment cycle (i.e., LCi 5 ti11 ti 5 LIi1LSi), (4)

the inventory level at time ti (i.e., ILi), (5) the number of stockouts prior to ti (i.e., SLi 1), and (6)

the economic order quantity at ti (i.e., OQi).

90 J.-T. Teng et al. / Intl. Trans. in Op. Res. 12 (2005) 83–100

By applying the Mean Value Theorem into equations (2) and (3), we know that there are li, ui11

and vi with si )li )tiþ1 )uiþ1 )siþ1 and ti )vi )tiþ1 such that

Z siþ1

0 0

ðch c ðtiþ1 ÞÞðsiþ1 tiþ1 Þf ðuiþ1 Þ ¼ðch c ðtiþ1 ÞÞ f ðtÞ dt

tiþ1

Z tiþ1

¼ðcs þ c0 ðtiþ1 ÞÞ f ðtÞ dt ¼ ðcs þ c0 ðtiþ1 ÞÞðtiþ1 si Þf ðli Þ

si

cs þ c0 ðtiþ1 Þ

¼ðcs þ c0 ðvi ÞÞ ðtiþ1 si Þf ðli Þ

cs þ c0 ðvi Þ

cs þ c0 ðtiþ1 Þ

¼ðch c0 ðvi ÞÞðsi ti Þ f ðli Þ:

cs þ c0 ðvi Þ ð7Þ

Therefore, we have

siþ1 tiþ1 ¼ ðsi ti Þ : ð8Þ

ch c0 ðtiþ1 Þ cs þ c0 ðvi Þ f ðuiþ1 Þ

tiþ1 si ¼ ðti si1 Þ ; ð9Þ

cs þ c0 ðvi Þ ch c0 ðti Þ f ðui Þ

Z siþ1 Z si

ch c0 ðvi Þ cs þ c0 ðtiþ1 Þ f ðli Þ

f ðtÞ dt ¼ f ðtÞ dt ; ð10Þ

tiþ1 ti ch c0 ðtiþ1 Þ cs þ c0 ðvi Þ f ðui Þ

Z tiþ1 Z ti

cs þ c0 ðti Þ ch c0 ðvi Þ f ðli Þ

f ðtÞ dt ¼ f ðtÞ dt ; ð11Þ

si si1 cs þ c0 ðvi Þ ch c0 ðti Þ f ðui Þ

tiþ1 ti ¼ ðti ti1 Þ ; ð12Þ

cs þ c0 ðvi Þ ch c0 ðti Þ f ðui Þ

and

Z siþ1 Z si

cs þ c0 ðti Þ ch c0 ðvi Þ f ðli Þ

f ðtÞ dt ¼ f ðtÞ dt ; ð13Þ

si si1 cs þ c0 ðvi Þ ch c0 ðtiþ1 Þ f ðui Þ

where si )li )tiþ1 )uiþ1 )siþ1 and ti )vi )tiþ1 . Consequently, we have the following

theorem:

J.-T. Teng et al. / Intl. Trans. in Op. Res. 12 (2005) 83–100 91

f (t)

{ LI i } { ILi } { LI i } { ILi } { LI i } { IL i }

Increasing { LS i } { SL i } { LS i } { SL i } { LS i } { SL i }

{ LC i } { OQi } { LCi } { OQi } { LC i } { OQ i }

{ LI i } { ILi } { LI i }= { IL i }= { LI i } { IL i }

Constant { LS i } { SL i } { LS i }= { SL i }=

{ LS i } { SL i }

{ LC i } { OQi } { LC i }= { OQi }= { LC i } { OQi }

{ LI i } { ILi } { LI i } { IL i } { LI i } { ILi }

Decreasing { LS i } { SL i } { LS i } { SL i } { LS i } { SL i }

{ LC i } { OQi } { LC i } { OQ i } { LC i } { OQi }

Note that an up arrow (or down arrow or equal sign) behind a sequence denotes that the sequence is

increasing (or decreasing or constant, respectively) with time. A blank behind a sequence means the

characteristic of the sequence is neither unique nor clear.

Proof. It immediately follows from (8) to (13). &

Theorem 3 reveals that: (a) If f(t) is increasing (or decreasing) and c(t) 5 a bt where a40,

ch4 b4 cs and t4min{H, a/b}, then the optimal shortage intervals {LSi }, the optimal inventory

intervals {LIi } and the optimal replenishment cycles {LCi } will be decreasing (or increasing) whereas

the optimal order quantities {OQi } will be increasing (or decreasing). A simple economic

interpretation of this result is as follows. Since demand is increasing (or decreasing) with time, we

need to shorten (or enlarge) the shortage intervals as well as the inventory intervals and hence the

replenishment cycles with time in order to lower the shortage cost as well as the holding cost and

hence the total cost. In the meantime, we need to increase (or decrease) the order quantities with time

in order to meet the increasing (or decreasing) demand. (b) If f(t) 5 D and c 0 (t) is increasing (or

decreasing) with ch4c0 (t)4 cs, the optimal shortage intervals {LSi } will be decreasing (or

increasing) whereas the optimal inventory intervals {LIi } will be increasing (or decreasing). A simple

economic interpretation of this is as follows. The marginal cost for storing an additional unit at time t

is ch c0 (t) and the marginal cost for shortening an additional unit at time t is cs c0 (t). Consequently,

if c0 (t) increases (or decreases), then the marginal inventory cost will decrease (or increase) whereas the

marginal shortage cost will increase (or decrease). Therefore, if c0 (t) increases, then the optimal

inventory intervals will increase whereas the optimal shortage intervals will decrease and vice versa.

Next, we investigate the conditions under which {LIi}, {LSi}, {ILi} and {SLi} increase or

decrease with time. By assuming li ! vi and ui11 ! ti11, we know from (8) and (11) that

ch c0 ðvi Þ cs þ c0 ðtiþ1 Þ f ðvi Þ

siþ1 tiþ1 ðsi ti Þ ; ð14Þ

cs c0 ðtiþ1 Þ cs þ c0 ðvi Þ f ðtiþ1 Þ

and

Z tiþ1 Z ti

cs þ c0 ðti Þ ch c0 ðvi Þ f ðvi Þ

f ðtÞ dt f ðtÞ dt : ð15Þ

si si1 cs þ c0 ðvi Þ ch c0 ðti Þ f ðti Þ

92 J.-T. Teng et al. / Intl. Trans. in Op. Res. 12 (2005) 83–100

For convenience, let

NðxÞ ¼ ðch c0 ðxÞÞf ðxÞ=ðcs þ c0 ðxÞÞ: ð16Þ

We then simplify (14) and (15) as:

siþ1 tiþ1 ðsi ti ÞNðvi Þ=Nðtiþ1 Þ; ð17Þ

and

Z tiþ1 Z ti

f ðtÞ dt f ðtÞ dt Nðvi Þ=Nðti Þ; ð18Þ

si si1

respectively. Taking the partial derivatives of N(x) with respect to x, we obtain:

c00 ðxÞf ðxÞðcs þ ch Þ þ ðch c0 ðxÞÞðcs þ c0 ðxÞÞf 0 ðxÞ

N 0 ðxÞ ¼ ; ð19Þ

ðcs þ c0 ðxÞÞ2

where c00 (x) denotes the second derivative of c with respect to x. For simplicity, let the ﬁrst

discrimination term

D1 ¼ c00 ðxÞf ðxÞðcs þ ch Þ þ ðch c0 ðxÞÞðcs þ c0 ðxÞÞf 0 ðxÞ: ð20Þ

Consequently, if DR140, then N(vRi)/N(ti11)o1 and N(vi)/N(ti)41 which in turn imply that siþ1

t ti

tiþ1 < si ti and siiþ1 f ðtÞ dt > si1 f ðtÞ dt; respectively. Similarly, let

D2 ¼ c00 ðxÞf ðxÞðcs þ ch Þ þ ðch c0 ðxÞÞðcs þ c0 ðxÞÞf 0 ðxÞ; ð21Þ

D3 ¼ c00 ðxÞf ðxÞðch cs 2c0 ðxÞÞ þ ðch c0 ðxÞÞðcs þ c0 ðxÞÞf 0 ðxÞ; ð22Þ

and

D4 ¼ c00 ðxÞf ðxÞðch cs 2c0 ðxÞÞ ðch c0 ðxÞÞðcs þ c0 ðxÞÞf 0 ðxÞ: ð23Þ

By using a similar argument, we can easily obtain the following theorem.

(a) If D140, then {LIi} & and {SLi} % , else if D1 5 0, then {LIi} and {SLi} , else {LIi} %

and {SLi} & .

(b) If D240, then {LSi} & and {ILi} % , else if D2 5 0, then {LSi} and {ILi} , else {LSi} %

and {ILi} & .

(c) If D340, then {LCi} & , else if D3 5 0, then {LCi} , else {LCi} % .

(d) If D440, then {OQi} & , else if D4 5 0, then {OQi} , else {OQi} % .

Note that the sequence before denotes that the sequence stays approximately the same at that

time when Di 5 0, for i 5 1, 2, 3, or 4.

While the general formulation discussed in the above section is useful to gain an insight into the

basic concepts as shown in Theorems 1–4, we can obtain stronger results for speciﬁc cases.

Consequently, we consider the following two special cases: (a) the case where the unit purchase

J.-T. Teng et al. / Intl. Trans. in Op. Res. 12 (2005) 83–100 93

cost is either increasing or decreasing linearly while the demand rate is constant, and (b) the case

where the demand is increasing but the unit purchase cost is strictly convex and declining.

In this subsection, we study the case where the purchase cost per unit changes linearly while the

demand rate remains constant. Consequently, the unit purchase cost at time t is c(t) 5 a bt. If

b40, then the unit purchase cost declines linearly. Otherwise (i.e., bo0), the unit purchase cost

increases linearly. Applying f(t) 5 D and c(t) 5 a bt to (2) and (3), we obtain the following

theorem:

Theorem 5. If f(t) 5 D and c(t) 5 a bt, where a40, ch4 b4 cs, and t4min {H, a/b}, then we

obtain the following results:

(a) The total number of replenishments

sﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃ

ðch þ bÞðcs bÞD

n¼H : ð24Þ

2ðch þ cs Þco

(b) The optimal order quantity

sﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃ

2ðch þ cs ÞDco

EOQ ¼ : ð25Þ

ðch þ bÞðcs bÞ

In the traditional EOQ model with a constant purchase cost per unit, storing one unit for a year

costs $ch for the inventory holding cost. In contrast, storing one unit for a year in the model

proposed here costs not only $ch for the inventory holding cost but also $b for the cost adjustment

(because the unit purchase cost is $b more expensive now than a year later). Similarly, shortening

one unit for a year in the traditional EOQ model is $cs for the shortage cost only. However,

shortening one unit for a year in this proposed model costs $cs for the shortage cost but saves $b

for the cost diﬀerence (because the unit purchase cost will be $b cheaper a year from now).

Consequently, the results in Theorem 3 are straightforward extensions of the traditional EOQ

model by replacing ch and cs in the traditional EOQ model with (ch1b) and (cs b), respectively.

Note that if n in (24) is not an integer, then let

$ sﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃ%

ðch þ bÞðcs bÞD

n1 ¼ H ; ð26Þ

2ðch þ cs Þco

where bxc denotes the largest integer not greater than x. Comparing W(n1) with W(n111), we

obtain the optimal number of replenishments as:

n1 if Wðn1 Þ)Wðn1 þ 1Þ;

n ¼ ð27Þ

n1 þ 1 otherwise:

94 J.-T. Teng et al. / Intl. Trans. in Op. Res. 12 (2005) 83–100

5.2. Declining cost and increasing demand

In Section 5.1, we studied the case in which demand is constant. As we know, the case only

occurs during the maturity stage of a product life cycle. In contrast to a constant demand, the

demand increases in the growth stage of a product life cycle. Therefore, in this subsection, we

investigate the case where the demand is increasing but the unit cost is strictly convex and

declining.

Example 1. Suppose that the demand function at time t is f(t) 5 150140t, the unit cost is

c(t) 5 200120 exp( 2t), H 5 3, co 5 300, ch 5 50, and cs 5 160 in appropriate units. Applying (6)

with b [c(0) – c(H)]/H, we have n1 5 11. Hence, we start the search for n with n 5 10 and 11.

The search ends at n 5 11. The optimal values of {ti } and {si } are shown in Table 2. The

minimum total relevant cost is 134,455.49. Since c(t) is convex and f(t) is increasing, we know

from Theorem 3 that {LSi} decreases with time, while {ILi} increases, which is shown in Table 2

below. Note that the numbers in Tables 2–4 are rounded.

Table 2 also reveals that those four discrimination terms in (20)–(23) are remarkably good

estimators for the trends of the corresponding sequences as shown in Theorem 4. For instance, D1

in Table 2 correctly indicates the trends (i.e., up and then down) of both {LIi} and {SLi}.

Likewise, D4 is negative for all i, and hence the order quantity {OQi} is increasing with time.

Next, we compare the diﬀerence in total costs obtained by the traditional EOQ model and the

model proposed here.

Example 2. Suppose that the demand function at time t is f(t) 5 270t, the unit cost is

c(t) 5 20170 exp( 1.28t), H 5 1, co 5 200, ch 5 20, and cs 5 90 in appropriate units. The

computational results obtained by our proposed model are shown in Table 3. The corresponding

minimum total relevant cost is 7,975.995. By contrast, using the traditional EOQ model, we

obtain

sﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃ

ﬃ

2ð200Þð135Þ 90 þ 20

Qopt ¼ ¼ 57:446: ð28Þ

20 90

Table 2

The computational results for Example 1

i ti si LIi SLi D1 LSi ILi D2 LCi D3 OQi D4

0 17.709 0.116

1 0.116 0.292 0.176 15.797 1639.83 0.097 27.808 2478.41 0.272 37.61 45.517 876.18

2 0.389 0.582 0.193 14.845 891.03 0.085 32.712 1665.79 0.278 58.4 48.510 833.16

3 0.667 0.869 0.203 14.442 420.54 0.078 36.644 1144.45 0.28 30.67 51.490 693.24

4 0.947 1.154 0.207 14.357 130.03 0.073 39.694 820.11 0.279 123.44 54.136 566.65

5 1.226 1.433 0.207 14.454 46.82 0.069 42.057 622.53 0.276 193.33 56.414 476.02

6 1.502 1.708 0.205 14.649 153.7 0.067 43.937 503.43 0.272 240.27 58.391 416.86

7 1.774 1.976 0.202 14.896 218.22 0.065 45.494 431.8 0.267 270.24 60.143 379.78

8 2.041 2.240 0.199 15.168 257.3 0.063 46.836 388.6 0.262 288.99 61.732 356.92

9 2.303 2.498 0.195 15.450 281.1 0.062 48.033 362.4 0.257 300.61 63.202 342.89

10 2.560 2.751 0.192 15.732 295.69 0.060 49.130 346.41 0.252 307.83 64.580 334.27

11 2.812 3 0.188 304.7 50.153 336.57 65.886 328.96

J.-T. Teng et al. / Intl. Trans. in Op. Res. 12 (2005) 83–100 95

Table 3

The computational results for Example 2

i ti si c ti LCi OQi

2 0.678 0.786 49.398 0.210 45.116

3 0.887 1 42.477 51.502

Table 4

The computational results for the traditional EOQ model

i ti si c ti LCi OQi

2 0.426 0.774 60.602 0.426 57.446

3 0.852 1 43.551 20.109

Thus, the computational results obtained by the traditional EOQ model are shown in Table 4 with

the minimum total relevant cost of 10,557.150. As a result, using the traditional EOQ model is

32.4% more expensive to operate than ours.

High-tech products are vital to today’s economy. The traditional EOQ model could not provide a

proper ordering policy for today’s high-tech products. In this paper, we establish not only the

optimal ordering policy but also the optimal purchasing policy for today’s high-tech products.

Consequently, we have made an important and signiﬁcant contribution to advance the ordering

policy for today’s high-tech products.

In this paper, we assume that not only the demand function but also the purchase cost is

positive and ﬂuctuating with time. Consequently, our model is suitable for any given time horizon

in any product life cycle including high-tech products. In addition, the proposed model is in a

general framework that includes numerous previous models such as Resh et al. (1976), Donaldson

(1977), Barbosa and Friedman (1978), Henery (1979), Dave (1989), Giri et al. (1996) and Teng

(1994, 1996) as special cases. In Section 3, we prove that the optimal replenishment schedule not

only exists but also is unique. In addition, we also show that the total cost associated with the

inventory system is a convex function of the number of replenishments. Hence, the search for the

optimal number of replenishments is simpliﬁed to ﬁnd a local minimum. Furthermore, we provide

an accurate starting value for searching the optimal replenishment number, which is more

computationally eﬃcient than enumerative methods. In Section 4, we characterize the inﬂuences

of both demand and unit purchase cost over the length of replenishment cycle, the economic order

quantity, and others. Furthermore, we derive four myopic formulae as the discrimination terms to

identify the up- and down-trends of replenishment length, order quantity and others. The

computational results in Section 5 profoundly justify our theoretical results.

96 J.-T. Teng et al. / Intl. Trans. in Op. Res. 12 (2005) 83–100

The proposed model can be extended in several ways. For instance, we may consider the

demand as a function of selling price as well as product quality. Also, we could extend the

deterministic demand function to stochastic ﬂuctuating demand patterns. Finally, we could

generalize the model to allow for quantity discounts, deteriorating items and others.

Acknowledgements

The authors would like to thank one of the referees for his constructive comments. This research

was partially supported by the National Science Council of the Republic of China under

Grant NSC-92-2213-E-007-065. In addition, the principal author’s research was supported by the

ART for Research and a Summer Research Funding from the William Paterson University of

New Jersey.

Let

Z si Z ti

Wi ðsi1 ; ti ; si Þ ¼ ðch ðt ti Þ þ cðti ÞÞf ðtÞ dt þ ðcs ðti tÞ þ cðti ÞÞf ðtÞ dt;

ti si1

We can easily obtain:

Z si Z ti

@Wi 0

¼ cðti Þf ðti Þ þ ðch þ c ðti ÞÞf ðtÞ dt þ cðti Þf ðti Þ þ ðcs þ c0 ðti ÞÞf ðtÞ dt

@ti ti si1

Z si Z ti ð29Þ

¼ ðch þ c0 ðti ÞÞf ðtÞ dt þ ðcs þ c0 ðti ÞÞf ðtÞ dt; si1 )ti )si ;

ti si1

If c0 ðtÞ*ch , then we know from (29) and (30) that @Wi =@ti *0 and L0 ðti Þ*0. Therefore, both

L(ti) and Wi are increasing with ti. Setting ti to be si 1, we get Wi ðsi1 ; ti ; si Þ*Wi ðsi1 ; si1 ; si Þ for

all i. Similarly, L(ti)XL(t1) 5 L(0) for all i. Consequently, we obtain

n Z si

X Xn Z si

Wðn; fsi g; fti gÞ*nco þ Lðti Þ f ðtÞ dt*nco þ Lð0Þ f ðtÞ dt

i¼1 si1 i¼1 si1

ð31Þ

Z H

*co þ ½ch t þ cð0Þf ðtÞ dt:

0

This completes the proof of (a).

Similarly, if c0 ðtÞ) cs ; then we have @Wi =@ti )0 and K 0 ðti Þ)0. Setting ti to be si,

we obtain Wi ðsi1 ; ti ; si Þ*Wi ðsi1 ; si ; si Þ. Similarly, Kðti Þ*Kðtn Þ ¼ KðHÞ for all i. Hence,

J.-T. Teng et al. / Intl. Trans. in Op. Res. 12 (2005) 83–100 97

we get

n Z

X si n Z

X si

Wðn; fsi g; fti gÞ*nco þ Kðti Þ f ðtÞ dt*nco þ KðHÞ f ðtÞ dt

i¼1 si1 i¼1 si1

ð32Þ

Z H

*co þ ½cs ðH tÞ þ cðHÞf ðtÞ dt;

0

Since s0 5 0 and t1 is unique, if we can prove that both si generated by (3) and tiþ1 by (2) are

uniquely determined, then we prove (a). Let

Since c(t) is diﬀerentiable, there exists a k (with ti4k4si) such that

From F 0 ðtiþ1 Þ ¼ c0 ðtiþ1 Þ þ cs > 0, we know that there exists a unique ti114si such that

F(ti11) 5 0. This implies that ti11 is uniquely determined by (2). Similarly, let

Z si Z ti

Gðsi Þ ¼ ðch c0 ðti ÞÞ f ðtÞ dt ðcs þ c0 ðti ÞÞ f ðtÞ dt: ð35Þ

ti si1

Z ti

Gðti Þ ¼ ðcs þ c0 ðti ÞÞ f ðtÞ dt < 0; ð36Þ

si1

and G0 ðsi Þ ¼ ðch c0 ðti ÞÞf ðsi Þ > 0. Thus, there exists a unique si (4ti) such that G(si) 5 0, which

implies that si is uniquely determined by (3).

For (d), we know from Hariga (1996, p. 1239) that if f(t) is positive and log-concave, then we

obtain

Z Z

0 f 0 ðti Þ si 0 f 0 ðti Þ ti

)½ch c ðti Þ f ðtÞ dt ¼ ½cs þ c ðti Þ f ðtÞ dt

f ðti Þ ti f ðti Þ si1 ð37Þ

Z ti

0

)½cs þ c ðti Þ f 0 ðtÞ dt ¼ ½cs þ c0 ðti Þ½f ðti Þ f ðsi1 Þ;

si1

since f 0 ðti Þ=f ðti Þ)f 0 ðtÞ=f ðtÞ, for si1 )t)ti . Diﬀerentiating (2) with respect to t1 and re-

arranging terms, we get

0 dtiþ1 dsi 0 dsi dti dti

½c ðtiþ1 Þ þ cs ¼ ½ch c ðtiþ1 Þ þ ½c0 ðti Þ c0 ðtiþ1 Þ : ð38Þ

dt1 dt1 dt1 dt1 dt1

98 J.-T. Teng et al. / Intl. Trans. in Op. Res. 12 (2005) 83–100

Likewise, diﬀerentiating (3) with respect to t1 and re-arranging terms, we have

0 dsi dti

½ch c ðti Þf ðsi Þ

dt1 dt1

Z si

0 00 dti

þ f½ch c ðti Þf ðsi Þ c ðti Þ f ðtÞ dt ½ch c0 ðti Þf ðti Þg ð39Þ

ti dt 1

Z ti

dti dsi1

¼ fc00 ðti Þ f ðtÞ dt þ ½cs þ c0 ðti Þf ðti Þg ½cs þ c0 ðti Þf ðsi1 Þ :

si1 dt1 dt1

Applying (37) into (39), and simplifying terms, we obtain

0 dsi dti

½ch c ðti Þf ðsi Þ

dt1 dt1

Z si ð40Þ

00 dti 0 dti dsi1

*½c ðti Þ f ðtÞ dt þ ½cs þ c ðti Þf ðsi1 Þ :

si1 dt1 dt1 dt1

If c00 (t) 5 0, then using the facts that ds0/dt1 5 0 and dt1/dt1 5 1, we obtain from (40) that ds1/

dt14dti/dt1. It is obvious from (38) that dt2/dt14ds1/dt1. Using (40) and (38) repeatedly, we get

dsn dtn dsn1 dtn1 ds2 dt2 ds1 dt1

> > > > > > > > ¼ 1 > 0: ð41Þ

dt1 dt1 dt1 dt1 dt1 dt1 dt1 dt1

Therefore, si and ti11 (with i41) obtained by (2) and (3) are monotonic increasing with t1. It is

obvious from (2) and (3) that sn(t1) o H if t1 5 0 and sn(t1) 4 H if t1 5 H. Therefore, there exists a

unique t1 in (0, H) such that sn(t1) 5 H. By using (c), we prove (d).

We know from (2) that the fraction of shortage in each cycle is constant as

ti si1 ch þ b

¼ ; i ¼ 1; 2; . . . ; n: ð42Þ

si si1 cs þ ch

Next, we know from Theorem 3 that the length of each replenishment cycle remains the same, as

H/n. Consequently, we have

t1 s0 H cs b H

t1 ¼ ¼ ; ð43Þ

s1 s0 n cs þ ch n

and

H cs b H

ti ¼ ði 1Þ þ t1 ¼ ði 1Þ þ ; for i ¼ 1; 2; . . . ; n: ð44Þ

n cs þ ch n

J.-T. Teng et al. / Intl. Trans. in Op. Res. 12 (2005) 83–100 99

Substituting (43) and (44) into (1), and simplifying the terms, we get:

ðch þ bÞðcs bÞDH 2 bH

WðnÞ Wðn; fti gÞ ¼ nco þ þ a DH: ð45Þ

2ðch þ cs Þn 2

Diﬀerentiating (45) with respect to n, and letting the result be zero, we then obtain the optimal

number of replenishments as

sﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃ

ðch þ bÞðcs bÞD

n ¼ H : ð46Þ

2ðch þ cs Þco

Therefore, the optimal order quantity is

sﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃ

DH 2ðch þ cs ÞDco

EOQ ¼ Dðt2 t1 Þ ¼ ¼ : ð47Þ

n ðch þ bÞðcs bÞ

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