Effect of declining selling price: profit analysis for a single period inventory model with stochastic demand and lead time

Abstract

In this paper, considering the empirical trend for sales and price of fashion apparels as prototype, optimal ordering policy for a single period stochastic inventory model is investigated. The impact of the presence of random lead time and declining selling price on the profitability of the retailer is explored. Existence of unique optimal solutions for net profit functions is proved. Numerical examples are presented to illustrate the method of identifying profitable levels of inventory holding and penalty costs. Percentage profit per unit investment in inventory is obtained in order to assist managers in taking business decisions, specifically to the extent of whether or not to take up a particular business under known constraints. It is demonstrated that the optimal inventory policy in the absence of price decline and lead time differs considerably from that when lead time and price decline are simultaneously considered.

Keywords:

• inventory
• random lead time
• declining selling price
• lost sales shortage

Acknowledgements

We are thankful to Professor T. Krishna Kumar, Director, Samkhya Analytica Pvt. Ltd, Bangalore, India for his helpful comments and suggestions.