Effect of deterioration on the instantaneous replenishment model with imperfect quality items

Abstract

The assumptions required to justify the use of the economic order quantity model (EOQ) are rarely met. To provide mathematical models that more closely represent real-life situations, these assumptions must be relaxed. Among these assumptions are, first, items stocked are of perfect quality, and second, they preserve their characteristics during their stay in inventory. This paper considers a modified EOQ-type inventory model for a deteriorating item with unreliable supply. That is, a percentage of the on-hand inventory is wasted due to deterioration. Moreover, orders may contain a random proportion of defective items, which follow a known distribution. As soon as an order is received, a retailer conducts a screening process to identify imperfect quality items, which are salvaged as a single batch at the end of the screening process. First, a mathematical model is developed, assuming that no shortages are allowed. For that, it is assumed that the inventory level when placing an order is just enough to cover the demand during the screening period. The concavity of the profit function is established and sensitivity analysis is provided to analyze the impact of changing various model parameters on the optimal order quantity and profit. Then, the assumption of no shortages is relaxed, and a model is developed to incorporate backorders. We analyze the model with backorders numerically and provide managerial insights. © 2014 Elsevier Inc.