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

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.

Keywords:

• inventory
• dynamic programming
• marketing
• pricing
• optimization
• deterioration

Periodic pricing and lot-sizing.

Periodic pricing and lot-sizing.

Acknowledgements

We thank the editor and two anonymous reviewers for their valuable and constructive comments, which have led to a significant improvement in the manuscript. This research was partially supported by the National Science Council (Taiwan) under Grant NSC91-2416-H-008-001.