Inventory control and purchasing-II

Most purchased materials and supplies are subject to increases in price over time, price inflation. This reached quite high levels in most European countries in the recent past and is apparently ever present in most developing countries. Thus a vital assumption of classical inventory theory, constant unit purchase prices, is incorrect. This paper reviews previous efforts to extend the EOQ model to cover this situation. It describes a new approach of modelling the effect of inflation as a series of discrete price jumps at stochastic intervals of time apart. The model and some interim results are discussed. It is shown that there are two critical levels of inflation, one below which inflation plays no role in the determination of the order quantities and a second above which a single purchase strategy for a limited planning horizon is best.