Abstract

In many inventory situations, purchasers are allowed a period to pay back for the goods bought without paying any interest. Depending on the length of that payment period, the purchaser can earn interest on the sales of the inventory. This paper develops a model to determine an optimal ordering policy for deteriorating items under inflation, permissible delay of payment and allowable shortage. The present value of total cost incurred in this inventory system is developed first, then an optimal order quantity and maximum allowable shortage are obtained by using a search procedure. The effect of inflation and time value of money was investigated under given sets of inflation and discount rates. This study shows that the optimal order quantity and maximum allowable shortage vary with the difference between inflation and time discount. Computational results provide some interesting policy implications.

Scope and purpose

A significant part of the manufacturing goods are usually kept in the supply chain, especially either in a manufacturer’s/wholesaler’s inventory or in a retailer’s storage. This paper addresses the ordering policy by a retailer of a perishable product, where the decision is influenced by the time value of money and inflation, and the retailer is allowed a delay period to pay back the dues for the products purchased. The purpose of this research is to aid the retailers in economically stocking the inventory (i.e., ascertaining the ordering quantity) under the influence of different decision criteria such as time value of money, inflation rates, purchase price of the product, and deterioration rate.

Author Keywords: Deterioration; Shortage; Delayed payment; Inflation; Time value of money

Corresponding author. Tel.: +1-225-388-5370; fax: +1-225-388-5109; email: bsarker@unix1.sncc.lsu.edu