Economic order quantities and inflation

Abstract

This paper addresses the inventory control problem of determining economic order quantities during inflation. A simple average annual cost model is constructed for which a closed-form solution is found. The solutions thus generated arc then compared with the optimal solutions to a ‘theoretically correct’ model whose objective is to minimize the discounted sum of all future costs. An exhaustive sensitivity analysis shows the simple closed-form solution to compare favourably with the minimum discounted cost solution over a wide range of problem parameters.