Pricing and lot-sizing for a deteriorating item in a periodic review inventory system with shortages

J. M. Chen, L. T. Chen

Research output: Contribution to journalArticlepeer-review

26 Scopus citations

Abstract

We consider a single product that is, subject to continuous decay, a multivariate demand function of price and time, shortages allowed and completely backlogged in a periodic review inventory system in which the selling price is allowed to adjust upward or downward periodically. The objective of this paper is to determine the periodic selling price and lot-size over multiperiod planning horizon so that the total discount profit is maximized. The proposed model can be used as an add-in optimizer like an advanced planning system in an enterprise resource planning system that coordinates distinct functions within a firm. Particular attention is placed on investigating the effect of periodic pricing jointly with shortages on the total discount profit. The problem is formulated as a bivariate optimization model solved by dynamic programming techniques coupled with an iterative search process. An intensive numerical study shows that the periodic pricing is superior to the fixed pricing in profit maximization. It also clarifies that shortages strategy can be an effective cost control mechanism for managing deterioration inventory.

Original languageEnglish
Pages (from-to)892-901
Number of pages10
JournalJournal of the Operational Research Society
Volume55
Issue number8
DOIs
StatePublished - Aug 2004

Keywords

  • Deterioration
  • Dynamic programming
  • Inventory
  • Marketing
  • Optimization
  • Pricing

Fingerprint

Dive into the research topics of 'Pricing and lot-sizing for a deteriorating item in a periodic review inventory system with shortages'. Together they form a unique fingerprint.

Cite this