Economic analysis of dynamic inventory models with non-stationary costs and demand

With today’s high rate of inflation observed in most world economies, the accuracy of standard lot-sizing models and their applicability to real inventory situations under inflationary conditions become questionable. In this paper, the effects of inflation and time value of money on the replenishment policies of items with time continuous non-stationary demand over a finite planning horizon have been studied. Dynamic programming models have been developed for three commonly used replenishment policies in the inventory lot-sizing literature with time varying demand and shortages. In the case of linear time-dependent demand, a sensitivity analysis to investigate the impact of changing the system parameters on the present worth of the total cost of each of the three replenishment policies has been performed. The results showed that the initial cycle length is virtually insensitive to the type of replenishment policy. The developed models have also been extended to more practical inventory situations with exponentially deteriorating items and perishable products having fixed life time.