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www.elsevier.com/locate/dsw

Invited Review

a,* b

S.K. Goyal , B.C. Giri

a

Department of Decision Sciences and MIS, Faculty of Commerce and Administration, Concordia University,

1455 De Maisonneuve Blvd. West Montreal, Que., Canada H3G 1M8

b

Department of Mathematics, Vivekananda College, Calcutta 63, India

Abstract

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.

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, foodstus, 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 suciently 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: sgoyal@vax2.concordia.ca (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 foodstus, 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-

models

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,

categories:

Cobbaert and Oudheusden [37] developed inven-

(i) Models for inventory with a ®xed lifetime

tory models for fast moving items subject to sud-

[81,89,99].

den death obsolescence. In their models, dierent

(ii) Models for inventory with a random lifetime

cases of obsolescence risk are studied allowing

[66,70±74,77,79,80,82,83,87,96,102].

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 dierent 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 dierential equation

combinations) of demand from the view point of

dI
t real life situations:

hI
t f
t;

dt

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

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.

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

dicult 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, eective 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 1 exp l
xdx ;

0

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 dierent, 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 eects 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 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 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 at; 0 < a 1; t > 0 and

lowed only in the ®rst
n 1 cycles over a ®nite time ®nite replenishment rate K 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 eect of

factor and the time at which the ith replenishment is dierent 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 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 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 dierent 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 aected 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

at

d
s; t
a bs e ; 6. Deteriorating inventory with permissible delay in

payment

where a; b; a > 0, s the selling price and the de-

mands during the stock out period are partially In practice, suppliers usually oer 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 dicult to estimate searchers examined the eect 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

b

deterministic Markov processes. Aggoun and his D 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 dierent 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-

X

b
T

ery, no shortage and a constant fraction of on-hand

l
T E
x=T xf
x=T ;

a
T

inventory deterioration.

The inventory positions Qx t t 0; 1; . . . ; T of 8. Price discount on deteriorating inventory system

the system at dierent points of time during the

scheduling period T are described by the following Empirical observations in the market place in-

dierence equation: dicate that a price reduction results in an increase

x in demand (except for some luxury goods where

Qx t 1 1 hQx t ; the demand increases even when the price in-

T 1

creases). This discount in price motivates the re-

t 0; 1; . . . ; T : tailers to increase their order quantity and the

retailers in turn oer a price discount to their

The boundary condition Qx 0 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 S 1 h ;

h T 1 h T 1 implemented by the suppliers to enhance sales.

t 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 eects 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 eect 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 dierent holding costs for

radically in the 1970s when the actual in¯ation dierent 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 dierent warehouses may

usual EOQ solution required necessary modi®ca- have dierent 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 eects 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), dierent 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 eects 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 dierence 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

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 dierent

levels of item deterioration in both warehouses.

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