The sensitivity of optimal inventory policies to model assumptions and parameters

In a previous work, the traditional EOQ model has been extended to consider various optimizing criteria and several demand and price structures. The resulting inventory decision rules are directed primarily toward the management of finished goods inventories, especially in retailing, where inventories are evaluated, as any other investment, on their ability to generate profits. This is in contrast to the usual least-cost objectives of raw materials or work-in-process inventory management, where inventory costs are viewed as another input cost of production. This paper analyzes in detail the analytical and computational implications of different cost structures and their effect on inventory policy. The models still consider demand to be a function of price and price, a markup on unit cost. The unit cost may be constant or subject to discount or learning effects. The decision variables are the markup and the order quantity. The object is still the maximization of the three most widely used indices of short-term asset performance, namely profits (PR), residual income (RI) and return on investment (ROI).