Inventory returns and special sales in a lot-size system with constant rate of deterioration (Q1072425)

The authors consider a variant of the standard Economic Order Quantity (EOQ) inventory model. The cost of ordering x amount of goods is \(Cx+C_ 3\), the inventory holding cost per unit time is a constant, \(C_ 1\), the demand for goods is a constant R units per unit time (and uniform over time), delivery is instantaneous, no shortages are allowed, and a constant fraction, \(\theta\), of the inventory deteriorates per unit time. If, for whatever reason, the values of these constants, C, \(C_ 1\), etc., change, the corresponding EOQ, q, changes as well. If the current inventory status, Q, is greater than q, then goods may be sold at a cost of \(C_ 4\) per unit. But to what level, S, should inventory be lowered? The optimal S is derived for both the infinite horizon case, where average total cost per unit time is minimized, and the finite horizon case, where total cost over the entire horizon is minimized. An example for each case is worked out and some sensitivity analysis is performed.