Korean J. Comp. & Appl. Math. Vol. 4 (1997), No. 2, pp.

397 - 407

AN EOQ MODEL FOR DETERIORATING INVENTORY

WITH ALTERNATING DEMAND RATES

A.K. PAL AND B. MANDAL

Abstract. The present paper deals with an economic order quan-

tity model for items deteriorating at some constant rate with demand
changing at a known and at a random point of time in the fixed pro-
duction cycle.

AMS Mathematics Subject Classification : 90B05

Key words and phrases : Inventory, EOQ model, deterioration, de-
mand rates, time-epoch, On-hand inventory, a random point of time,
day by day
1. Introduction

The economic order quantity model is the oldest inventory control

model. In the year 1915, Harris [2] have discussed this model. Osteny-
oung et al. [6] in one of their recent publications have reported that this
model is still widely used in industry, although the assumptions neces-
sary to justify its use such as constant demand rate, known inventory
holding and set up costs, no shortages allowed etc. are rarely met.
Numerous research efforts have been under taken to extend the model
of Harris and Wilson to conform more closely with real-world situations.
Attempts in analyzing mathematical models of inventory in which a con-
stant or variable proportion of the on-hand inventory deteriorates with
time have been under taken by Ghare and Schrader [7], Goel and Aggar-
wal [12], Covert and Philip [8], Shah [9], Misra [10], Datta and Pal [11],
etc. to name only a few.

Received January 22, 1997. Revised May 30, 1997.

c 1997 Korean Society for Computational & Applied Mathematics and Korean SIG-

COAM(Korea Information Processing Society).
397
398 A.K. Pal and B. Mandal

Such economic order quantity models with time dependent demand

rates have also been investigated by various others researchers like Don-
aldson [13], Silver [14], Buchanan [15], Ritchie [16], Datta and Pal [17]
etc. Recently, Dhandra and Prasad [1] have discussed an inventory model
assuming demand rates for the inventory changing at a known and at a
random point of time in the fixed production cycle. In the present paper,
attempts have been made to extend the model developed by Dhandra and
Prasad to a situation where the inventory is deteriorating at a constant
rate along with the demand rate changing as in Dhandra and Prasad [1].
Such fluctuation in the demand rate is quite realistic and it may occur
due to any of the following reasons.
(i) a particular item becoming obsolate day by day and non-availability
of its spare parts.
(ii) due to higher or lower purchasing cost of the items.
2. Assumptions and Notations of the Problem
The model is developed under the following assumptions :
(i) Replenishment size is constant and the replenishment rate is in-
finite.
(ii) Lead time is zero.
(iii) Shortages are not allowed.
(iv) A constant fraction of the on-hand inventory deteriorates per
time unit and the deteriorated item is lost.
(v) Lenght T of each production cycle is constant.
In addition to these assumptions, the following notations are used in
the problem.
I(t) : Inventory level at time t( 0).
R(t) : Demand rate at time t( 0).
Y : Time epoch at which the demand rate changes.
K : Fixed ordering cost of inventory.
c : Cost of unit item.
h : Holding cost per unit item per unit time.
3. The Mathematical Model
Let Q be the total amount of inventory produced at the beginning of
each period. Since we have assumed an alternating demand rate for the
cycle time T . We can take R(t) in the following form :
(
1 : 0 t z
R(t) =
2 : z t T
 An EOQ Model for Deteriorating Inventory 399

where z = min(Y, T ) is the epoch at which the demand rate changes.

Hence the differential equation which the on-hand inventory must satisfy
in the two different parts of the cycle time T are the following
(
dI(t) 1 , 0 t z (1)
+ I(t) =
dt 2 , z t T (2)
Using the conditions I(0) = Q and I(T ) = 0 and neglecting higher powers
of (<< 1), the solutions of the above differential equations are
( 2
Q(1 t) 1 (t t2 ), 0tz (3)
I(t) = z 2 t
Q(1 t) (1 2 )[z(1 t) + 2 ] 2 t[1 2 ], ztT (4)

Since I(T ) = 0, we get neglecting terms of order higher than 0(2 ) the
following
z 2 T 2
Q = (1 2 )[z + ] + 2 [T + ] (5)
2 2
The average number of units AI(T ) in the inventory during the period
(0, T ) is
Z
1 T
AI(T ) = I(t) dt
T Z0 z Z T
1
= [ I(t)dt + I(t)dt]
T 0 z
Substituting the values of I(t) in the above integrals and then eliminating
Q using equation (5) and neglecting higher order terms in we find the
following :
1 z 2 z 3 T 2 T 3
AI(T ) =[(1 2 )( + ) + 2 ( + )] (6)
T 2 6 2 6
Therefore, aveage cost per unit time in (0, T ) is
K + cQ h z 2 z 3 T 2 T 3
c(T, z) = + [(1 2 )( + ) + 2 ( + )]
T T 22 6 22 6
z T
= K/T + c[(1 2 )(z + ) + 2 (T + )]/T
2 3
2 2 3
2
z z T T
+h[(1 2 )( + ) + 2 ( + )]/T
2 6 2 6
We now minimize the average cost per unit time c(T, z) under the fol-
lowing two situtations :
(i) z is a known point of time.
(ii) z is a random point of time.
Case I : z is a known point of time.
400 A.K. Pal and B. Mandal

(a) For z T .
In this case, the expression for the average cost c(T, z) reduces to the
following
T 2 T 2 T 3
c(T ) = K/T + c1 [T + ]/T + h1 [ + ]/T
2 2 6
which is the cost function of the EOQ inventory model for deteriorating
items.
If there be no deterioration i.e. = 0, the above expression further
simplifies to the following
c(T ) = K/T + c1 + h1 T /2
which is similar to the equation obtained by Harris and Wilson.
(b) For z < T .
Since z < T , we can take z = 0 T, 0 0 < 1.
Thus from expression (6), we find
T 2 0 T 3 T 2 T 3
AI(T ) = [(1 2 )02 ( + ) + 2 ( + )]/T
2 6 2 6
Hence (7) reduces to the following
0 T T 0 T
c(T ) = K/T + c1 0 (1 + ) + c2 (1 0 )(1 + + )
2 2 2
hT 0 T T 2 T
+ [1 02 (1 + ) + 2 (1 0 ){(1 + 0 )(1 + ) + 0 }]
2 2 3 3
(8)
For minimum average cost, the necessary condition is c(T T
)
= 0.
This gives
h + c 2 h 2
K/T 2 + [0 1 + (1 02 )2 ] + T [1 03 + 2 (1 03 )] = 0
2 2 3
or, LT 3 + MT 2 + N = 0 (9)
where

2
L = h[1 03
+ 2 (1 03 )]

3 (10)
M = (h + c)[1 02 + 2 (1 02 )]


N = 2K
Since 0 0 < 1 and the last term of the cubic equation (9) is negative,
it has at least one positive real root.
 An EOQ Model for Deteriorating Inventory 401

Let T be the positive real root of the equation (9), then T is the
optimum cycle time. It can also be seen that the sufficient condition for
minimum cost
2 c(T )
|T =T > 0 is satisfied.
T 2
From expression (5), we can determine the optimum value of Q as follows.
0 T T
Q = 1 0 T [1 + ] + 2 T (1 0 )[1 + ] (11)
2 2
The expression for the minimum cost c(T ) can be obtained by substi-
tuting T = T in the equation (8) where T is the optimum cycle time
to be obtained from equation (9).
Particular Cases :
(i) Absenece of deterioration :
In the absence of deterioration ( = 0), the expression for the minimum
cost c(T ) and the optimum ordering quantity Q reduce to the following
:
hT 2
c(T ) = [K/T + c0 (1 2 ) + c2 + {0 (1 2 ) + 2 }]
2
and Q = 1q 0 T + 2 T (1 0 )
where T = 2K/[1 02 + 2 (1 02 )]h

(ii) Demand rate is uniform; (1 = 2 )

In this case, the expression for the minimum cost c(T ) and the opti-
mum order quantity Q are found to be
c1 T h1 T T
c(T ) = K/T + c1 (1 + 0 ) + (1 + 02 ) + [1 + + 03 T /6]
2 2 3

and Q = 1 T [1 + T3 ]
where the optimum cycle time T is the positive real root of the cubic
equation
h
1 (03 + 2)T 3 + (h + c)1 T 2 2K = 0
3
(iii) Uniform demand rate and absence of deterioration :
(1 = 2 , = 0).
In this case, the expression for the minimum cost
q
c = c1 + 2h1 K
402 A.K. Pal and B. Mandal

The optimum cycle time and order quantity are the following
q q
T = 2K/h1 , Q = 2K1 /h.
Case II : z is a random point of time.
From equation (7), we have
z 2 T 2
c(T, z) = K/T + c[(1 2 )(z + ) + 2 (T + )]/T
2 2
z 2 z 3 T 2 T 3
+h[(1 2 )( + ) + 2 ( + )]/T
2 6 2 6
In this case, the cost function c(T, z) is a random variable with respect
to z.
So expected total cost per unit time is
1 T 2
(T ) = [K + c(1 2 )[E(z) + E(z 2 )] + c2 (T + )]
T 2 2
23
h 1 2 h T T
+ (1 2 )[ E(z 2 ) + E(z 3 )] + ( + ) (12)
T 2 6 T 2 6
Let us now assume the distribution function of z to be Fz ().
Therefore we can take
"
FY (u), u < T
F z (u) =
0 uT

as in Dhandra and Prasad (1).

Hence the expected values of z, z 2 and z 3 are the following
Z T
E(z) = F Y (u)du
Z0 T
E(z 2 ) = 2uF Y (u)du
Z0 T
E(z 3 ) = 3u2 F Y (u)du.
0

Substituting these integrals for E(z), E(z 2 ) and E(z 3 ) in the equation
(12), the expected total cost reduces to the following
RT R
(T ) = 1
T
[K (1 2 ){c F Y (u)du + (h + c) 0T uF Y (u)du
0
h Z T 2 cT 2 hT 2 hT 3
+ u F Y (u)du} + 2 (cT + + + )]
2 0 2 2 6
(13)
 An EOQ Model for Deteriorating Inventory 403

Equation (13) is of the form R+(T

(T )
)
, T 0, where R = K.
Now (0) = (0), and (T ), (T ) are continuously differentiable func-
tions in [0, ) with strictly positive derivatives 0 (T ) and 0 (T ) for all
T 0.
Moreover, D(T ) = 0 (T )/0 (T )
hT
= [2 + (2 1 )F Y (T )][c + hT + T (c + )]
2
is a monotonic increasing function of T for 2 > 1 .
Hence by using Puri and Singhs [5] result, it can be claimed that there
exists unique global minimum for a value of T which is the optimum cycle
time T .
Substituting this value of T in the equation (13), the minimum ex-
pected cost can be evaluated.
For 2 < 1 , the optimum value of the cycle time T has been obtained
for the following two particular cases assuming the time instant z to be
a function of some parameter which ranges over some space in
which a probability density function p() is defined.
In this situation, the expression for the expected total cost (T ) can
be written as follows
Z Z
1
(T ) = [K + c(1 2 ){ z()p()d + z 2 ()p()d}
T 2
T 2 h 1Z 2
+c2 (T + )] + (1 2 )[ z ()p()d
Z 2 T 2
2 h T 2 T 2
+ z 3 ()p()d] + ( + ) (14)
6 T 2 6
Example 1. Let z() = a + b, a, b > 0
(
e , > 0
and p() =
0, elsewhere.
Substituting for z() and p() in the equation (14) and then simplifying
we find the expected cost.
1
(T ) = [K + c(1 2 ){(a + b) + (a2 + 2ab + 2b2 )}
T 2
T 2 h 1
+c2 (T + )] + (1 2 )[ (a2 + 2ab + 2b2 )
2 T 2
3 2 2 3 2 h T 2 T 3
+ (a + 3a b + 6ab + 6b )] + ( + ).
6 T 2 6
404 A.K. Pal and B. Mandal

(T )
Now equating T
to zero, we get the following

3
T + 2 (h+c)
2 h 3
2
T 2 [K + (1 2 ){c(a + b)
+ 2 (a + 2ab + 2b2 )(h + c) + h
1 2
6
(a3 + 3a2 b +
6ab2 + 6b3 )}] = 0.
(15)
Since 1 > 2 , the above cubic equation must have one positive real root
which is the optimum cycle time T .
Using (5), we get the expected optimum ordering quantity is
2
< Q >= (1 2 )[a + b + (a2 + 2ab + 2b2 )] + 2 [T + T ] (16)
2 2
Now we have studied the following three situations :
(i) when there is no deterioration ( = 0).
In this case equation (15) reduces to the following
2 h 2 h
T [K + (1 2 ){c(a + b) + (a2 + 2ab + 2b2 )}] = 0
2 2
Therefore the optimum cycle time is
h
T = [2K/2 h + 2(1 2 ){c(a + b) + (a2 + 2ab + 2b2 )}/2 h]1/2
2
Also from (16), the optimum ordering quantity is
< Q > = (1 2 )(a + b) + [2K2 /h + 22 (1 2 ){c(a + b)
h
+ (a2 + 2ab + 2b2 )}/h]1/2
2
(ii) when there is no change of demand rate i.e. uniform demand rate
(1 = 2 ).
In this case equation (15) gives
2 h 3 2
T + (h + c)T 2 K = 0
3 2
The optimum cycle time T can be obtained from the above cubic equa-
tion.
Also the optimum ordering quantity

< Q >= 2 [T + T 2 ].
2
(iii) when there is no deterioration and no change of demand rate ( =
0, 1 = 2 ).
Therefore from equation (15), the optimum cycle time is
T = [2K/1 h]1/2
 An EOQ Model for Deteriorating Inventory 405

Hence optimum ordering quantity is

< Q >= [2K1 /h]1/2 .
Example 2.
Assuming z() = a + b, a, b > 0
1 m1
(m,n)
(1 )n1 , 0<<1
and p() = m, n > 0


0, elsewhere
Thus from (14), we get the following :
1
(T ) = [K + c(1 2 ){a + bm/(m + n)
T

+ (a2 + 2abm/(m + n) + b2 m(m + 1)/(m + n)(m + n + 1))}
2
T 2 h 1
+c2 (T + )] + (1 2 ){ (a2 + 2abm/(m + n)
2 T 2

+b m(m + 1)/(m + n)(m + n + 1)) + (a3 + 3a2 bm/(m + n)
2
6
+3ab2 m(m + 1)/(m + n)(m + n + 1)
+b3 m(m + 1)(m + 2)/(m + n)(m + n + 1)(m + n + 2))}
2 h T 2 T 3
+ ( + ).
T 2 6
Equating (T
T
)
to zero, we get the following cubic equation in T
2 h 3
3
T + 22 (h + c)T 2 [K + (1 2 ){c(a + bm/(m + n))
+ 12 (a2 + 2abm/(m + n) + b2 m(m + 1)/(m + n)(m + n + 1))(h + c)
+ h6
(a3 + 3a2 bm/(m + n) + 3ab2 m(m + 1)/(m + n)(m + n + 1)
3
+b m(m + 1)(m + 2)/(m + n)(m + n + 1)(m + n + 2))}] = 0
(17)
Since 1 > 2 , the above equation has a positive real root T which is the
optimum cycle time T .
Thus using the expression (5), the expected optimum ordering quantity
is

< Q > = (1 2 )[a + bm/(m + n) + (a2 + 2abm/(m + n)
2
T 2
+b m(m + 1)/(m + n)(m + n + 1))] + 2 [T +
2
]
2
(18)
Let us now consider the following cases :
(i) Absence of deterioration ( = 0)
406 A.K. Pal and B. Mandal

The optimum cycle time T and optimum ordering quantity Q are

obtained by the following expressions [using (17) and (18)].

T = [2K/2 h + 2(1 2 ){c(a + bm/(m + n))

h
+ (a2 + 2abm/(m + n)
2
+b2 m(m + 1)/(m + n)(m + n + 1))}/2 h]1/2
and
< Q > = (1 2 )(a + bm/(m + n))
+[2K2 /h + 22 (1 2 ){c(a + bm/(m + n))
h
+ (a2 + 2abm/(m + n)
2
+b2 m(m + 1)/(m + n)(m + n + 1))}/h]1/2
(ii) No change of demand rate (1 = 2 )
The optimum cycle time T can be obtained by solving the following
equation
h2 3 2 (h + c) 2
T + T K =0
3 2
Substituting T = T in the following expression we get the optimum
expected ordering quantity

< Q >= 1 [T + T 2 ]
2
(iii) When the deterioration is absent and the demand rate is uniform
( = 0, 1 = 2 ) : -
using (17) and (18), the optimum cycle time and optimum ordering
quantity are the following
)
T = [2K/1 h]1/2
< Q > = [2K1 /h]1/2

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A.K. Pal and B. Mandal

Department of Mathematics
Jadavpur University
Calcutta - 700032, INDIA