Inventory and pricing strategies for deteriorating items with shortages: A discounted cash flow approach

Inventory and pricing strategies for deteriorating items with shortages: A discounted cash flow approach

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Article ID: iaor20072173
Country: Netherlands
Volume: 52
Issue: 1
Start Page Number: 29
End Page Number: 40
Publication Date: Feb 2007
Journal: Computers & Industrial Engineering
Authors: , ,
Keywords: economic order, deteriorating items
Abstract:

In this article, we consider an infinite horizon, single product economic order quantity where demand and deterioration rate are continuous and differentiable function of price and time, respectively. In addition, we allow for shortages and completely backlogged. The objective is to find the optimal inventory and pricing strategies maximizing the net present value of total profit over the infinite horizon. For any given selling price, we first prove that the optimal replenishment schedule not only exists but is unique. Next, we show that the total profit per unit time is a concave function of price when the replenishment schedule is given. We then provide a simple algorithm to find the optimal selling price and replenishment schedule for the proposed model. Finally, we use a couple of numerical examples to illustrate the algorithm.

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