Optimal Buyer-Seller Discount Pricing and Ordering Policy for Deteriorating Items

ABSTRACT

Substantial research on inventory has been done over the years, but with little attention to buyer-seller pricing relationships for deteriorating items. We develop a model with an exponentially decaying inventory to determine optimal joint total relevant annual cost of the buyer and seller. Our analysis extends the research to an all-unit quantity discount inventory policy for deteriorating items with various deterioration rates and negotiation factors. The objective is to determine the optimal replenishment interval and discount price so that the joint total annual cost is minimized. Sensitivity analysis in the numerical example shows that optimal order interval and joint system cost are very sensitive to the deterioration rate. This shows the importance of considering the effect of deterioration.