Discrepancies in solutions between traditional and net present value formulations of finite horizon, discrete-time economic lot size problems

Abstract

Studies that compare the Economic Order Quantity formula and similar models against their more correct net preset value (NPV) counterpart formulations have shown that the difference in discounted cost is relatively small, even in extreme cases. In this paper, we perform a similar comparison between traditional and NPV formulations of finite horizon, discrete-time economic lot sizing problems. Surprisingly, and in sharp contrast to earlier studies, we find that the traditional and NPV models can yield substantially different discounted costs and inventory policies. The results are extended to the currently emerging, similar models with pricing decisions.

Keywords:

• Inventory
• Lot-sizing
• Pricing
• Opportunity cost
• Net preset value

Acknowledgement

This research was partially supported by the ITESM Extended Enterprise for Mass Customization Research Chair in Industrial Engineering.