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European Journal of Operational Research 134 (2001) 1±16

Invited Review

Recent trends in modeling of deteriorating inventory

a,* b
S.K. Goyal , B.C. Giri
Department of Decision Sciences and MIS, Faculty of Commerce and Administration, Concordia University,
1455 De Maisonneuve Blvd. West Montreal, Que., Canada H3G 1M8
Department of Mathematics, Vivekananda College, Calcutta 63, India

Received 28 August 1999; accepted 13 July 2000


This paper presents a review of the advances of deteriorating inventory literature since the early 1990s. The models
available in the relevant literature have been suitably classi®ed by the shelf-life characteristic of the inventoried goods.
They have further been sub-classi®ed on the basis of demand variations and various other conditions or constraints.
The motivations, extensions and generalizations of various models in each sub-class have been discussed in brief to
bring out pertinent information regarding model developments in the last decade. Ó 2001 Elsevier Science B.V. All
rights reserved.

Keywords: Inventory models; Deteriorating items

1. Introduction impact on modeling of such an inventory system

cannot be ignored.
Most of the existing inventory models in the Inventoried goods can be broadly classi®ed into
literature assume that items can be stored inde®- three meta-categories based on
nitely to meet the future demands. However, cer- (a) obsolescence,
tain types of commodities either deteriorate or (b) deterioration,
become obsolete in the course of time and hence (c) no obsolescence/deterioration.
are unstable. For example, the commonly used Obsolescence refers to items that lose their va-
goods like fruits, vegetables, meat, foodstu€s, lue through time because of rapid changes of
perfumes, alcohol, gasoline, radioactive sub- technology or the introduction of a new product
stances, photographic ®lms, electronic compo- by a competitor. Style goods must be sharply re-
nents, etc., where deterioration is usually observed duced in price or otherwise disposed o€ after the
during their normal storage period. Therefore, if season is over. For example, spare parts for mili-
the rate of deterioration is not suciently low, its tary aircraft are style goods and they become ob-
solete when a replacement model is introduced.
Corresponding author. Fax: +1-514-848-8645. Deterioration refers to the damage, spoilage,
E-mail address: (S.K. Goyal). dryness, vaporization, etc. of the products. The

0377-2217/01/$ - see front matter Ó 2001 Elsevier Science B.V. All rights reserved.
PII: S 0 3 7 7 - 2 2 1 7 ( 0 0 ) 0 0 2 4 8 - 4
2 S.K. Goyal, B.C. Giri / European Journal of Operational Research 134 (2001) 1±16

products like foodstu€s, green vegetables, human which can be found in the review articles of Nah-
blood, photographic ®lm, etc., having a maximum mias [88] (Perishable Inventory Theory) and
usable lifetime are known as perishable products Raafat [100]. In 1991, Raafat [100] provided a
and the products like alcohol, gasoline, radioactive comprehensive survey on continuously deteriorat-
substances, etc. having no shelf-life at all are ing inventory models where the deterioration is
known as decaying products. Also, the shelf-life of considered as a function of the on-hand inventory.
some products can be inde®nite and hence they The objective of the present article is to review the
would fall under the no obsolescence/deterioration advances of deteriorating inventory literature after
category. Raafat's [100] survey.
In the present article, we will not consider the
replenishment policies for inventory which are
2. Classi®cation of the deteriorating inventory
subject to obsolescence. Also, considerable atten-
tion has not yet been given on modeling of such an
inventory system only because once the items be-
The inventory models available in the relevant
come obsolete they are not reordered. Very few
literature can be classi®ed broadly on the basis of
problems on obsolescence have been addressed by
shelf-life characteristics into the following three
the researchers, see [88] for references. Recently,
Cobbaert and Oudheusden [37] developed inven-
(i) Models for inventory with a ®xed lifetime
tory models for fast moving items subject to sud-
den death obsolescence. In their models, di€erent
(ii) Models for inventory with a random lifetime
cases of obsolescence risk are studied allowing
both shortages and without shortages in inventory.
(iii) Models for inventory which decays corre-
The cost related to the obsolescence risk could be
sponding to the proportional inventory decrease
found in the model developed by van Beek et al.
in terms of its utility or physical quantity.
[14] for simultaneous lot sizing and capacity
However, the random lifetimes in continuous re-
planning in multi-stage assembly networks.
view models are discussed under the title of ``ex-
Inventory problems for deteriorating items
ponential decay'', giving the impression that all
have been studied extensively by many researchers
models with random lifetimes can be grouped into
from time to time. Research in this area started
a lower level category of models with exponential
with the work of Whitin [126] who considered
distributed lifetimes.
fashion goods deteriorating at the end of pre-
Considerable amount of research work has
scribed storage period. An exponentially decaying
been devoted on decaying inventory systems. Nu-
inventory was developed ®rst by Ghare and
merous mathematical models have been proposed
Schrader [42]. They observed that certain com-
from time to time by di€erent researchers in order
modities shrink with time by a proportion which
to accommodate various realistic factors.
can be approximated by a negative exponential
As demand plays a key role in modeling of
function of time. This observation led to the
deteriorating inventory, researchers have recog-
modeling of the inventory items with decay pro-
nized and studied the following variations (or their
cesses by the di€erential equation
combinations) of demand from the view point of
dI…t† real life situations:
‡ hI…t† ˆ f …t†;
2.1. Deterministic demand
where h is the constant decay rate, I…t† the inven-
tory level at time t, and f …t† is the demand rate at (i) Uniform demand [48,61,101].
time t. (ii) Time-varying demand [2,9±11,13,15±
Since then considerable work has been done on 17,19,22±25,29±31,33,34,44±46,49,50±52,56±60,
deteriorating inventory system, the details of 62,67,68,75,85,98,117,120,127±129].
S.K. Goyal, B.C. Giri / European Journal of Operational Research 134 (2001) 1±16 3

(iii) Stock-dependent demand [38,43,47,90,92, (FIFO) or Last-In-First-Out (LIFO) issuing pol-

97,103,106]. icy. It is, therefore, an important problem of
(iv) Price-dependent demand [76,121,122]. ®nding the optimal ordering policy which is closely
related to that of ®nding suitable issuing policy for
such a perishable inventory system. Inventory
2.2. Stochastic demand models for ®xed lifetime perishable products have
been studied by Nandakumar and Morton [89]
(i) With known probability distribution and Liu and Lian [81].
[71,73,77,80,102]. Nandakumar and Morton [89] derived near
(ii) With arbitrary probability distribution myopic bounds on the order quantities and used
[4,5,39,74,82]. the bounds to evaluate the performance of the
In developing the models, they have adopted resulting heuristics. The near myopic approach,
many of the usual assumptions in inventory, viz. basically, casts any periodic inventory problem in
(a) allowing shortage or without shortage, (b) ®- the framework of a newsboy problem and at-
nite/in®nite replenishment rate, (c) ®nite/in®nite tempts to bound the various newsboy parameters.
planning horizon, (d) partial/complete/no back- The upper and lower bounds of various parame-
logging of unsatis®ed demand, (e) constant/vary- ters lead to bound on the order quantity.
ing deterioration rate, (f) zero/constant/known Liu and Lian [81] analyzed an …s; S† continuous
distribution/unknown distribution lead time, (g) review perishable inventory system with a general
single/multi-item inventory system, (h) single/ renewal demand process and instantaneous re-
multi-stage production inventory system, etc. plenishments. Using a Markov renewal approach,
Researchers have developed a number of in- they obtained closed-form solutions for the steady
ventory models for deteriorating items with the state probability distribution of the inventory level
aim of incorporating various other realistic con- and system performance measures. They also
ditions or constraints into it. With this perspec- constructed a closed-form expected cost function
tive, the available models can be grouped as and showed that for any ®xed S, the cost function
following: is either monotone or convex in s.
(i) Models with permissible delay in payments Perry [99] considered a perishable inventory
[3,32,63,69,78,109,110,114]. system where the commodity's arrival and cus-
(ii) Models with announced price increase [111± tomer demand processes are stochastic and the
113]. stored items have a constant lifetime. The stock
(iii) Models under available price discount [123]. level is represented by the amount arriving during
(iv) Models under in¯ation and time value of the life of the oldest item and it is assumed to
money [27,28,35,55,105,116]. ¯uctuate as an alternating two-sided regulated
(v) Models with two levels of storage facility Brownian motion between barriers 0 and 1. Hit-
[18,26,64,93±95]. tings of level 0 are outdatings and hittings of level
1 are unsatis®ed demands. A useful martingale is
introduced for analyzing the controlled process as
3. Inventory models for ®xed lifetime products well as the total expected discounted cost.

Fixed lifetime products have deterministic shelf

life i.e. if a product remains unused up to its life- 4. Inventory models for random lifetime products
time, it is considered to be out-dated and must be
disposed o€. Important examples are human The products whose exact lifetime cannot be
blood used for transfusion, pharmaceutical prod- determined in advance while in stock are known as
ucts, most food products, photographic ®lm, etc. random lifetime products. A typical example is
The ®xed lifetime products in inventory are usually fresh produce whose time of spoilage is uncertain
depleted following either First-In-First-Out and as a result the lifetime is assumed to be a
4 S.K. Goyal, B.C. Giri / European Journal of Operational Research 134 (2001) 1±16

random variable. The analysis of random lifetime perishable system with Poisson demands and ar-
perishable inventory system is considerably more bitrarily distributed lead times for items with
dicult as compared to its ®xed lifetime counter- constant failure rates.
part. Most of the models on continuously reviewed Ravichandram [102] studied a similar model
inventory systems deal with an instantaneous with a Poisson demand process, a constant lifetime
supply of items. A few Markovian …s; S† systems and a random lead time with a general distribu-
with zero lead time have been studied by Kalpa- tion. He also allowed only one outstanding re-
kam and Arivarignan [70], Liu [79] and Pal [96]. plenishment order and assumed that the aging of
Moorthy et al. [87] proposed an inventory the fresh stock begins only after all remaining old
model in which an item is put on display and be- units are depleted. Liu and Yang [83] considered
comes available only after the presently displayed the case when the replenishment lead time is ex-
item is sold or expired. The aging process of an ponential and no restriction is placed on the
item is assumed to begin after it is put on display. number of outstanding orders. They obtained a
They analyzed the model with an Erlang lifetime matrix-geometric solution to the steady-state
distribution, a renewal demand process and a zero probability distribution of the inventory level.
lead time. Kalpakam and Sapna [72] extended Pal [96]'s
A stochastic dynamic programing model was work to the case with a general lead time distri-
developed by Jain and Silver [66] to determine the bution. They used the Markov renewal technique
optimal ordering policy for a random lifetime to analyze the behavior of the inventory level
perishable or potentially obsolate product. They process. The same technique is used by them [74]
considered the product lifetime as a discrete ran- to present a lost sale …S 1; S† perishable inven-
dom variable which follows an arbitrary proba- tory system with renewal demand and exponen-
bility distribution. At the end of each discrete tial life and lead times. In this case, since the
period, the total remaining inventory is assumed to output process is not renewal, they speci®ed the
be worthless or unusable for at least the next pe- inventory level process as a semiregenerative
riod. They also presented two approximate solu- process and then employed the usual Markov
tion methods based on Silver±Meal heuristic and renewal techniques to obtain various operating
Wagner±Whitin algorithm. Krishnamoorthy and characteristics.
Varghese [77] studied a continuous review …s; S† Liu and Cheung [80] developed a single item
inventory system with Poisson demand where continuous review inventory models with Poisson
commodities are assumed to be damaged due to demands, exponentially distributed lifetimes and
decay and disaster. They considered the lifetime of replenishment lead times including all the possi-
an item and times between the disasters to be ex- bilities of partial backlogging, complete backlog-
ponential and derived the transient and steady- ging and complete lost sales. They analyzed the
state probabilities assuming no shortage and zero models via a continuous time Markov chain and
lead time in inventory. derived a few steady-state system performance
When a positive order lead time is introduced in measures including the average stock failure de-
the problem the analysis becomes extremely com- pletion rate, e€ective demand rate, stock replen-
plex. Kalpakam and Sapna [71] analyzed an …s; S† ishment rate, expected inventory levels and
perishable system with Poisson demands and ex- expected customer waiting times. Based on these
ponentially distributed lead times for items with results, they determined the optimal control policy
exponential lifetimes. They derived an exact cost for the inventory system.
function and obtained some useful analytical Recently, Liu and Shi [82] reconsidered the
properties regarding the reorder point s assuming model of Liu [79] with a general renewal demand
that the number of outstanding replenishment through a Markov process. They assumed that
orders is restricted to be one and the demands the demands are singleton and follow a renewal
during the stock out periods are lost completely. process with inter-demand time distribution
Kalpakam and Sapna [73] also dealt with an …s; S† function
S.K. Goyal, B.C. Giri / European Journal of Operational Research 134 (2001) 1±16 5

 Z t 
within some short period of time subsequent to
f …t† ˆ 1 exp l…x†dx ;
purchase. He considered the age at which the
vendor outdates units as a decision variable and
where l…t† is the hazard rate (probability intensity analyzed the interaction between inventory or-
that a demand will occur t time units after the dering and outdate policy for a perishable item
previous demand). with random lifetime. As such, the model repre-
They derived a fundamental rate conservation sents a synthesis of the ®xed versus random life-
theorem and showed that by the expected reorder time perishable inventory literature.
cycle length, all the other system performance
measures can be obtained easily and the total long
run cost rate function can be reduced to a very 5. Deteriorating inventory with deterministic de-
simpli®ed form. mand
Aggoun and his co-workers [4±7] made signi®-
cant contributions by introducing ®ltering theory 5.1. Uniform demand
to stochastic inventory systems of perishable items.
Aggoun et al. [4] introduced a parametric multi- Most of the inventory models developed in the
period integer valued inventory model for perish- last few years are based on non-stationary de-
able items where the demands are assumed to be mand. However, Raafat et al. [101] developed an
random and each item in stock is assumed to inventory model for deteriorating items with con-
perish in period n with probability …1 an †; stant demand rate and ®nite replenishment rate.
0 < an < 1: They suggested various parameter es- Heng et al. [61] integrated Shah [108]'s and Mishra
timators of the model using measure change [86]'s models considering a ®nite replenishment
techniques and set an optimal stochastic control rate, constant demand rate and exponential decay
formulation for the model. in inventory.
In both ®xed and random lifetime perishability, Goh et al. [48] considered two-stage perishable
the utility of an individual product is assumed to inventory systems where demand is considered to
be constant. Although the utility deterioration of be for fresh items or for somewhat older items. The
individual product and the decay of the product ®rst stage holds fresh items and the second stage
inventory level are conceptually di€erent, both holds the older items. Inventory is issued according
approaches measure the loss of perishable prod- to FIFO policy within each stage. The inventory
ucts by deterioration. But for the perishable system has been analyzed under both restricted
products like fresh vegetables, breads, fruits, dairy policy (where the inventory in the ®rst stage is re-
products, etc., the utility decreases continuously served for requests of fresh items even when there
with time. The degree of deterioration of product is no inventory in the second stage) and unre-
utility can be treated as a penalty cost. Fujiwara stricted policy (where the request of older items
and Perera [41] considered two types of penalty can be satis®ed by items in the ®rst stage but only
cost functions ± a linear penalty cost function pt, when there is no inventory in the second stage).
and an exponential penalty cost function a…ebt 1† Wee and Shum [124] studied an optimal re-
as the cost of keeping one unit of product in stock plenishment policy for deteriorating inventory in a
until age t, a > 0, b > 0 and p being constants. single level MRP system. Their analysis is based
They obtained the closed forms of the economic on the traditional approaches by Wagner±Whitin,
order quantities in both the cases by using a sec- the Silver±Meal and least-unit-cost methods.
ond-order approximation of exponential terms.
Vaughan [118] developed a new model of the
perishable inventory system which recognizes and 5.2. Time-varying demand
incorporates the e€ects of consumer-realized
product expiration. Such expiration occurs when The assumption of constant demand rate is not
units are expired at the time of sale or expire always applicable to many inventory items (e.g.
6 S.K. Goyal, B.C. Giri / European Journal of Operational Research 134 (2001) 1±16

electronic goods, fashionable clothes, tasty foods, time. Jalan and Chaudhuri [67] and Chakrabarty
etc.) as they experience ¯uctuations in the demand et al. [29] presented inventory models for deterio-
rate. Many products experience a period of rising rating items with instantaneous supply in inven-
demand during the growth phase of their product tory. They used a two-parameter and a three-
life cycle. On the other hand, the demand of some parameter Weibull distribution to represent the
products may decline due to the introduction of time to deterioration.
more attractive products in¯uencing customers' The consideration of exponentially decreasing
preference. Moreover, the age of the inventory has demand for deteriorating items was ®rst analyzed
a negative impact on demand due to the loss of by Hollier and Mak [62] who obtained optimal
consumer con®dence on the quality of such prod- replenishment policies under both constant and
ucts and physical loss of the materials. This phe- variable replenishment intervals. Hariga and Ben-
nomenon prompted many researchers to develop kherouf [60] generalized Hollier and Mak's [62]
deteriorating inventory models with time varying model taking into account both exponentially
demand pattern. In developing inventory models, growing and declining markets. Wee [120] con-
two kinds of time-varying demands have been sidered a deterministic lot size model to derive
considered so far (a) continuous-time and (b) dis- optimal service level and replenishment frequency
crete-time. Most of the continuous-time inventory for deteriorating items where demand declines
models have been developed considering either exponentially over a ®xed time horizon, scheduling
linearly increasing/decreasing demand [D…t† ˆ periods are taken to be of equal lengths and
a ‡ bt; a > 0; b >< 0] or exponentially increasing/ shortages are allowed except for the initial and
decreasing demand [D…t† ˆ A eat ; A > 0; a >< 0] ®nal period inventory. Later, Benkherouf [19]
patterns. showed that the optimal procedure suggested by
In the early 1990s, Haiping and Wang [53] de- Wee [120] is independent of the demand rate.
veloped an economic policy model for deteriorat- Benkherouf and Mahmoud [23] were the ®rst to
ing items with time proportional demand and propose an inventory model for deteriorating
obtained a closed form solution of optimum order items with a general increasing time-varying de-
quantity. Xu and Wang [127,128] presented in- mand pattern. Later, Benkherouf [16] and Ben-
ventory models for exponentially deteriorating kherouf and Mahmoud [24] developed another
items with linearly time-varying demand. They two inventory models for the class of demand
[127] obtained the optimal replenishment policy by functions D…t† that are decreasing with D…t†=D0 …t†
a dynamic programing recursion similar to Wag- non-increasing in t and are increasing with
ner±Whitin algorithm. D…t†=D0 …t† non-decreasing in t, respectively. Hariga
Goswami and Chaudhuri [49] discussed the in- [58] developed optimal inventory lot sizing models
ventory replenishment problem over a ®xed plan- for deteriorating items with a general class of in-
ning horizon for an item deteriorating at a constant creasing and decreasing demand functions which
rate and with a linear trend in demand, shortages in vary in log-concave fashion with time over a ®nite
inventory being allowed. They restricted the re- planning horizon and under three replenishment
plenishment cycles to be of equal duration. policies viz. DAC (Deb and Chaudhuri [40]),
Inventory models have been developed so far GMN (Goyal, Morin, Nebebe [52]) and SRP
over a prescribed ®nite or in®nite planning hori- (Sachan Replenishment Policy [104]). The pro-
zon. Chung and Ting [33] proposed ®rst a heuristic posed procedure for each policy is shown to gen-
model for deteriorating items with linear trend in erate a unique optimal schedule over the ®xed
demand for obtaining the replenishment times of planning horizon. An extensive empirical com-
the inventory system whether or not a planning parison using randomly generated linear and ex-
horizon exists. Giri and Chaudhuri [44] developed ponential demands showed that GMN
heuristic models, in the lines of Chung and Ting replenishment policy is the least cost policy and
[33], where the demand rate, deterioration rate and the DAC replenishment policy exhibited the best
all the cost components were assumed to vary with service level performance.
S.K. Goyal, B.C. Giri / European Journal of Operational Research 134 (2001) 1±16 7

Hariga and Al-Alyan's [59] model is concerned Goswami and Chaudhuri [50] proposed two
with a lot sizing heuristic for deteriorating items in deterministic inventory models by assuming the
growing and declining markets with shortages al- deterioration rate h…t† ˆ at; 0 < a  1; t > 0 and
lowed only in the ®rst …n 1† cycles over a ®nite time ®nite replenishment rate K ˆ bf …t†; b > 1 and f …t†
horizon. Giri et al. [45] reconsidered the problem of being the demand rate at any time t. No inventory
Hariga and Al-Alyan [59] to allow shortages in all shortage is permitted in the ®rst model while
cycles following GMN policy. Mandal and Pal [85] shortages are allowed and backlogged in the sec-
developed an order level inventory system for de- ond model.
teriorating items with demand rate a ramp type Wee [119] developed an economic production
function of time. Chang and Dye [31] discussed an lot size model for deteriorating items with partial
inventory model under GMN policy where the de- backordering and obtained the time intervals and
mand rate f …t† is assumed to be a time-continuous cycle time that minimize the total cost function.
monotonic function with f …t†=f 0 …t† non-decreasing Goyal and Gunasekaran [51] developed an in-
in t and items are deteriorated at a constant rate with tegrated production inventory marketing model
partial backlogging. They de®ned the backlogging for determining the economic production quantity
rate to be 1=…1 ‡ a…ti t††, a decreasing function of (EPQ) and economic order quantity (EOQ) for
the waiting time for the next replenishment where raw materials in a multi-stage production system.
a…> 0† and ti being, respectively, the backlogging In their paper, they also considered the e€ect of
factor and the time at which the ith replenishment is di€erent marketing policies such as the price per
made. unit product and the advertisement frequency on
Teng et al. [117] considered four possible re- the demand of a perishable product.
plenishment policies for deteriorating items over a Deteriorating inventory models with time-
®xed planning horizon where the demand function varying demand and production rates have been
is taken to be positive and ¯uctuating with time considered by Balkhi and Benkherouf [10,11].
which is more general than increasing, decreasing Srinivasan and Lee [115] studied the perishability
and log-concave demand patterns. They analyti- problem in production±inventory systems where
cally identi®ed the best alternative among them on the facility is assumed to deteriorate during pro-
the basis of the least total relevant costs and also duction. Pal and Mandal [98] dealt with an EOQ
showed that the relevant cost is a convex function model for items deteriorating at some constant
of the number of replenishments. rate with demand changing at a known point of
Inventory models for deteriorating items have time and at a random point of time in the ®xed
also been studied by Balki [12], Benkherouf [15± production cycle. Yan and Cheng [129] determined
17], Chakrabarty et al. [30], Giri et al. [46], Hariga the optimal production stopping and restarting
[56,57], Jalan and Chaudhuri [68], and Kim [75]. time for an EOQ model where the demand rate,
All these models were developed for an in®nite production rate and deterioration rate all are as-
replenishment rate. Only a few research articles sumed to be dependent on time. Balki [13] pre-
have involved ®nite rate of replenishment. sented an inventory model for integrated
Hollier and Mak [62] obtained replenishment production system with a single product and
policies for deteriorating items in an exponentially proved the global optimality of the solution to the
declining market under both constant and variable proposed model. He considered the production,
replenishment intervals. Aggarwal and Bahari- demand and deterioration rates for the ®nished
Kashani [2] extended Hollier and Mak's [62] model product and the deterioration rates for the raw
to allow ¯exible rates of production in each period materials as the known functions of time.
without shortages. Raafat et al. [101] also derived Bhunia and Maity [25] developed two inventory
an alternative method for ®nding the optimal re- models assuming that the replenishment rate is ®-
plenishment schedule in Mak's [84] model which is nite and dependent on the on-hand inventory and
concerned with a production inventory with Wei- demand simultaneously. The deterioration rate
bull distribution deterioration and backlogging. and the demand rate are assumed to be linearly
8 S.K. Goyal, B.C. Giri / European Journal of Operational Research 134 (2001) 1±16

increasing functions of time. The replenishment rating inventory models with stock-dependent
rate R…t† is dependent on the on-hand inventory consumption rate. Inventory models for a single
level Q…t† and the demand rate D…t† of any time t deteriorating item with stock-dependent demand
such that rate have been studied extensively in the last de-
cade by Datta and Pal [38], Giri and Chaudhuri
R…t† ˆ a bQ…t† ‡ rD…t†; [43], Giri et al. [47], Padmanabhan and Vrat
a > 0; r P 0; 0 6 b < 1 [90,92], Pal et al. [97], and Sarkar et al. [106].
Padmanabhan and Vrat [92] presented inventory
and models for deteriorating items with stock-depen-
h…t† ˆ k ‡ lt; 0 < k; l 6 1; t > 0: dent selling rate and derived the pro®t functions
for both without backlogging and complete
Andijani and Al-Dajani [9] presented an in- backlogging cases. They assumed the selling rate
ventory±production system where items deterio- as a function of the current inventory level and
rate at a constant rate. The inventory problem is rate of deterioration as constant. Recently, Chung
®rst modeled as a linear optimal control problem et al. [36] considered the problem of Padmanabhan
taking a general demand function. Linear qua- and Vrat [92] and derived the necessary and su-
dratic regulator (LQR) technique is then applied cient conditions of the existence and uniqueness of
to control problem in order to determine the op- the optimal solutions of the pro®t per unit time
timal production policy. Numerical examples are functions.
solved for three di€erent kinds of demand func- A multi-item inventory with stock-dependent
tions ± constant, linear and quadratic. demand rate was solved by Padmanabhan and
Aliyu and Boukas [8] considered discrete-time Vrat [91] by a nonlinear goal programming. Roy
models of production±inventory systems with de- and Maity [103] developed multi-item inventory
teriorating items. They developed control strate- models of deteriorating items with stock-depen-
gies for both single-item and multi-item systems. dent demand rate in a fuzzy environment. They
The linear quadratic (LQ) criterion is used to de- assumed the total average cost, warehouse space,
rive the optimal control policies. Since the opera- inventory costs, purchasing and selling prices to be
tions of the production system are surrounded by vague and imprecise. Impreciseness of objective
many uncertain parameters and also the deterio- goals and resource constraints have been expressed
ration rate of items is taken to be arbitrary, they by fuzzy membership functions and vagueness in
developed a robust policy that guaranteed the inventory costs and prices by fuzzy numbers.
stability of the system and an upper limit on the
cost criteria under all possible parameters.
5.4. Price-dependent demand

5.3. Stock-dependent demand In reality, the retailer's lot size is a€ected by the
demand of the product and the demand is depen-
It is a common phenomenon observed in the dent on the price of the product. Therefore, the
supermarket that a large pile of goods attracts problem of determining the retail price and lot size
more customers. Hence a retailer may display each are inter-dependent. Joint price and lot size de-
of his items in large quantities to generate greater termination problems for deteriorating products
demand. Then there must arise the problem of were studied by Kim et al. [76] (constant rate of
space allocation for each item and investment re- deterioration) and Wee [122] (varying rate of de-
quirement resulting from the increased inventory terioration). Wee [121] also studied the joint pric-
levels. The situation becomes more complex when ing and replenishment policy for a deteriorating
the inventory displayed is deteriorating in nature. inventory with price elastic demand rate that de-
This complexity has in¯uenced many marketing cline over time. He assumed the demand rate
researchers and practitioners to analyze deterio- d…s; t† at price s and time t; t P 0 as
S.K. Goyal, B.C. Giri / European Journal of Operational Research 134 (2001) 1±16 9

d…s; t† ˆ …a bs† e ; 6. Deteriorating inventory with permissible delay in
where a; b; a > 0, s the selling price and the de-
mands during the stock out period are partially In practice, suppliers usually o€er some credit
backordered. periods to the retailers in order to stimulate the
Abad [1] considered the dynamic pricing and demand for the products they produce. They do
lot sizing problem of a perishable good under not charge any interest on the outstanding
partial backlogging of demand. He modeled the amount if the retailers settle the account with
backlogging phenomenon using a new approach in them within the allowable delay period. This
which customers are considered impatient. When a brings some economic advantage to the retailers
stock out situation occurs, only a fraction of de- as they may earn some interest from the revenue
mand occuring at a given time is backordered. realized during the period of permissible delay.
And that fraction is a decreasing function of the Haley and Higgins [54] introduced the ®rst
waiting time. The approach given is revenue based model to consider the EOQ under conditions of
and does not require to specify the backorder cost permissible delay in payments. Later many re-
or lost sale cost which is very dicult to estimate searchers examined the e€ect of trade credit on
in reality. the optimal inventory replenishment policy under
various practical situations.
Jaggi and Aggarwal [65] developed an inven-
5.5. Deteriorating inventory with stochastic demand tory model for obtaining the optimal order quan-
tity of deteriorating items in the presence of trade
Dave [39] considered a probabilistic schedul- credit using discounted cash-¯ows (DCF) ap-
ing period inventory system for items that dete- proach.
riorate continuously in time and the demand is Kim et al. [76] introduced the retailer's price
assumed to occur instantaneously at the begin- and lot size problem under the condition of per-
ning of the scheduling period. He ®rst developed missible delay in payments where retailer's bor-
the model with a non-zero lead time . Then, as a rowing and lending rates of capital are assumed to
special case, considered the lead time as a mul- be equal which seems to be quite restrictive from
tiple of the scheduling period. Inventory models the practical point of view.
for deteriorating items with stochastic demand Hwang and Shinn [63] considered the problem
were also developed by Aliyu and Boukas [8], of determining the retailer's optimal price and
Pakkala and Achary [93], Shah [113], and Shah lot size simultaneously when the supplier permits
and Shah [114]. Recently, Aggoun et al. [7] and delay in payments for an order of a product
Benkherouf et al. [21] addressed stochastic jump whose demand rate …D† is represented by a
inventory models for deteriorating items and constant price elasticity function of retail price,
developed optimal control policies for them. viz.
These models belong to the class of piecewise
deterministic Markov processes. Aggoun and his D ˆ KP ;
co-workers [4±6,20] introduced discrete time in-
teger-valued inventory models for perishable where K…> 0† is the scaling factor, P the
items where each item in stock is assumed to unit retail price 6 Pu , a given upper limit of the
perish in a given period with some probability. retail price, b…> 0† is the index of the price
Aggoun et al. [5] assumed that all perished items elasticity.
sold are returned by the end of the selling pe- They further assumed the retailer's borrowing
riod. Based on the number of returned items and rate to be larger than or equal to his lending rate.
the level of inventory, recursive estimates for the Aggarwal and Jaggi [3] developed a model to
probability of the number of perished items in determine the optimum order quantity for deteri-
the stock were suggested. orating items under a permissible delay in
10 S.K. Goyal, B.C. Giri / European Journal of Operational Research 134 (2001) 1±16

payments. Their model does not allow for short- maximum possible demand during the scheduling
ages. Jamal et al. [69] generalized the model of period T.
Aggarwal and Jaggi [3] to the case of allowable
shortage. Aggarwal and Jaggi's [3] solution pro-
cedure is improved by Chu et al. [32] by estab- 7. Inventory of deteriorating items under a known
lishing that the total cost function of Aggarwal price increase
and Jaggi [3] is piecewise convex but not convex in
general. When the price of the commodity being replen-
Recently, Liao et al. [78] developed inventory ished is expected to increase by a ®xed amount from
models for initial stock-dependent consumption some future date the basic problem of how much
rate when a delay in payment is permissible under quantity should be purchased at the present lower
two di€erent circumstances: (i) the credit period is price by placing a special order arises. The purchase
less than or equal to the cycle time and (ii) the costs and ordering costs are reduced by increasing
credit period is greater than the cycle time for the order quantity. This, in turn, increases the in-
settling the account. ventory carrying costs. The problem becomes more
Shah and Shah [109,110] proposed both deter- complex when the items purchased are subject to
ministic and probabilistic models for exponentially deterioration while in inventory. Shah and Shah
decaying inventory when delay in payments is [111,112] developed probabilistic and deterministic
permissible. These models are developed taking time scheduling period models for exponentially
the time as continuous variable. They [114] also decaying inventory when the price per unit of the
developed a discrete-in-time probabilistic model commodity is known to increase by a ®xed amount
assuming the demand …x† as a random variable and items in the inventory are subjected to deterio-
which follows a probability density function ration. Shah [113] considered the same problem
f …x=T †; a…T † 6 x 6 b…T †, with with a discrete-in-time probabilistic inventory
model under the conditions of instantaneous deliv-
b…T †
ery, no shortage and a constant fraction of on-hand
l…T † ˆ E…x=T † ˆ xf …x=T †;
a…T †
inventory deterioration.

where l…T † is the mean demand during T .

The inventory positions Qx …t†…t ˆ 0; 1; . . . ; T † of 8. Price discount on deteriorating inventory system
the system at di€erent points of time during the
scheduling period T are described by the following Empirical observations in the market place in-
di€erence equation: dicate that a price reduction results in an increase
x in demand (except for some luxury goods where
Qx …t ‡ 1† ˆ …1 h†Qx …t† ; the demand increases even when the price in-
…T ‡ 1†
creases). This discount in price motivates the re-
t ˆ 0; 1; . . . ; T : tailers to increase their order quantity and the
retailers in turn o€er a price discount to their
The boundary condition Qx …0† ˆ S gives the so-
customers to increase demand and pro®t. More-
lution of above equation as
over, in order to reduce the loss due to deteriora-
x t x tion a discount pricing policy is frequently
Qx …t† ˆ …S ‡ †…1 h† ;
h…T ‡ 1† h…T ‡ 1† implemented by the suppliers to enhance sales.
t ˆ 0; 1; . . . ; T ; This strategy is commonly practiced in supermar-
kets e.g. milk and bread are sold at a discount
where h is the constant rate of deterioration per price when the expiration date of the items are
unit of time, S the order-level inventory. near. Wee and Yu [123] considered the e€ects of
They derived the total average expected cost for the temporary discount sale when the items dete-
two particular forms of the function b…T † ± the riorate exponentially with time.
S.K. Goyal, B.C. Giri / European Journal of Operational Research 134 (2001) 1±16 11

9. Deteriorating inventory with in¯ation and time 10. Deteriorating inventory with two warehouses
value of money
Traditional inventory models are developed
The basic assumption in the classical EOQ mainly for a single warehouse. In practice, due to
model is that all the cost components associated limited capacity of showroom facility in own
with the inventory system remain constant over warehouse (OW), an additional storage space
time. Before 1970, the e€ect of in¯ation was not known as rented warehouse (RW) is often required
considered for analyzing inventory systems per- by the business organizations. Since these ware-
haps because of the belief that in¯ation would houses need not have the same preservation facil-
not in¯uence the inventory policy to any signi®- ity and environment conditions, it is quite
cant degree. However, the situation changed appropriate to assume di€erent holding costs for
radically in the 1970s when the actual in¯ation di€erent warehouses. Again, since the deteriora-
rate in most of the Western countries shot up to tion depends on preserving facility available in a
be in the range 8±20% and as a matter of fact the warehouse, hence the di€erent warehouses may
usual EOQ solution required necessary modi®ca- have di€erent deterioration rates. Thus it becomes
tions. The ®rst attempt in this direction was by a common problem of deciding how much to keep
Buzacott [28]. After that several researchers have excess stock in RW so that the total cost of the
extended his approach to various interesting sit- system is minimized. Two warehouse inventory
uations. models have been considered by Pakkala and
Bose et al. [27] and Hariga [55] developed two Achary [93±95], Ishii and Nose [64], Benkherouf
inventory models incorporating the e€ects of in- [18], and Bhunia and Maity [26].
¯ation and time value of money in their models Pakkala and Achary [93,94] developed both
with constant rate of deterioration (exponential deterministic and probabilistic two-warehouse in-
decay) and time proportional demand. A heuristic ventory models for deteriorating items with ®nite
model was presented by Chung et al. [35]. replenishment rate and shortages. These models
Su et al. [116] studied an inventory model under assumed time as a continuous variable. Pakkala
in¯ation for stock-dependent consumption rate and Achary [95] also proposed a discrete-in-time
and exponential decay. They assumed that the model for deteriorating items with two levels of
consumption rate is a function of the order storage facility.
quantity. Ishii and Nose [64] investigated the optimal
Wee and Law [125] employed the concept of ordering policies for a perishable product with two
in¯ation and time value of money into the model types of customers ± high priority ones (who are
where demand is price-dependent and shortage is sensitive to freshness of the products) and low
allowed. The model considered a production en- priority ones (who are not so sensitive to freshness
vironment with a ®nite replenishment rate. An of the products), di€erent selling prices and the
optimization framework is presented to derive capacity constraint of OW. The demands in suc-
optimal production and pricing policies when the cessive periods are assumed to be independent
total net present value is maximized. non-negative random variables with known dis-
Recently, Sarker et al. [105] determined an op- tribution functions and high and low priority de-
timal ordering policy for deteriorating items in a mands are taken to be independent. The stock is
supply chain system under in¯ation and time value assumed to be depleted by high priority demand
of money, permissible delay in payment and al- ®rst and then low priority demand using FIFO
lowable shortage. They studied the e€ects of in- issuing policy.
¯ation and and time value of money under given Sarma [107] developed a model for a single
sets of in¯ation and discount rates and concluded deteriorating item where both the demand rate and
that the optimal order quantity and maximum deterioration rate are assumed to be constant over
allowable shortage vary with the di€erence be- a ®xed scheduling time and OW is used to its full
tween in¯ation and time discount. capacity. Benkherouf [18] relaxed the assumptions
12 S.K. Goyal, B.C. Giri / European Journal of Operational Research 134 (2001) 1±16

of ®xed cycle length and known quantity to be Acknowledgements

stocked in OW and obtained the optimal schedule
that minimizes the total cost per unit time in a The authors would like to thank the anony-
cycle for an arbitrary demand function where cy- mous referees for their valuable comments and
cles are assumed to form a regenerative process. suggestions which helped immensely in producing
Recently, Bhunia and Maity [26] analyzed de- the revised version of this article.
terministic inventory models allowing di€erent
levels of item deterioration in both warehouses.

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