International Journal of Computational and Applied Mathematics

ISSN 1819-4966 Volume 4 Number 1 (2009), pp. 83–94

© Research India Publications
http://www.ripublication.com/ijcam.htm

Two-warehouse Inventory Model for Deteriorating

Items with Shortages under Inflation and Time-value
of Money

S. R. Singh1, Neeraj Kumar2 and Rachna Kumari3

1
Deptt. of Mathematics, D.N. College, Meerut
E-mail: shivraj@gmail.com
2
Deptt. of Applied Science, IIMT Engineering College, Meerut
E-mail: neerajkapil99@yahoomail.com
3
Deptt. of Mathematics, Meerut College, Meerut
E-mail: kumarn_inde@yahoo.com

Abstract

An inventory problem for a deteriorating item having two separate

warehouses, one is a own warehouse (OW) of finite dimension and the other
rented warehouse (RW) of infinite dimension, is developed under inflation and
time value of money. Deterioration rates of items in the two warehouses may
be different, which is time dependent. In addition, we allow for shortages and
complete backlogging. Due to different facilities and storage environment,
inventory holding cost is considered to be different in different warehouses.
The demand rate of items is linear with time, the stocks of RW transported to
OW in continuous release pattern.

Keywords: Two-warehouse, Time-dependent deterioration, Time-dependent

demand rate, Inflation and time-value of money.

1. Introduction
In the busy markets like super market, municipality market etc. the storage area of
items is limited. When an attractive price discount for bulk purchase is available or
the cost of procuring goods is higher than the other inventory related cost or demand
of items is very high or there are some problems in frequent procurement,
management decide to purchase a large amount of items at a time. These items cannot
be accommodated in the existing storehouse (viz. the Own Warehouse, OW) located
at busy market place. In this situation, for storing the excess items, one additional
84 S. R. Singh, Neeraj Kumar and Rachna Kumari

warehouse (viz. rented warehouse, RW) is hired on rental basis, which may be located
little away from it. We assume that the rent (hold cost for the item) in RW is greater
than OW and hence the items the items are stored first in OW and only excess stock is
stored in RW, which are emptied first by transporting the stocks from RW to OW in a
continuous release pattern for deducing the holding cost. The demand of items is met
up at OW only.
An early discussion on the effect of two warehouses was considered by Hartely
(1976) recently this type of inventory model has been considered by other authors.
Sarma (1983) developed a deterministic inventory model with finite replenishment
rate; Dave (1988) further discussed the cases of bulk release pattern for both finite and
infinite replenishments. He rectified the errors in Murdeshwar and Sathe (1985) and
gives a complete solution for the model given by Sarma (1983). In the above
literature, deterioration phenomenon was not taken into account. Assuming the
deterioration in both warehouses, Sarma (1987), extended his earlier model to the case
of infinite replenishment rate with shortages. Pakkala and Achary (1992) extended the
two-warehouse inventory model for deteriorating items with finite replenishment rate
and shortages, taking time as discrete and continuous variable, respectively. In these
models mentioned above the demand rate was assumed to be constant. Subsequently,
the ideas of time varying demand and stock dependent demand considered by some
authors, such as Goswami and Chaudhary (1998), Bhunia and Maiti (1998),
Bankerouf (1997), Kar et al. (2001) and others. Bhunia and Maiti (1994) extended the
model of Goswami and Chaudhary (1972), in that model they were not consider the
deterioration and shortages were allowed and backlogged. Yang (2004) provided a
two-warehouse inventory model for a single item with constant demand and shortages
under inflation. Instead of the classical view of accumulating shortages at the end of
each replenishment cycle, an alternative model in which each cycle begins with
shortages has been proposed here. Zhou and Yang (2005) studied stock-dependent
demand without shortage and deterioration with quantity based transportation cost,
Wee, Yuond Law (2005) considered a two-warehouse model with constant demand
and weibull distribution deterioration under inflation. Yang (2006) extended Yang
(2004) to incorporate partial backlogging and then compared the two-warehouse
models based on the minimum cost approach.
Due to high inflation and consequent sharp decline in the purchasing power of
money in the developing countries like Brazil, Argentina, India, Bangladesh etc., the
financial situation has been completely changed and so it is not possible to ignore the
effect of inflation and time value of money any further. Following Buzacott (1975)
and Misra (1979), several researchers (1997, 2000 etc.) have extended their
approaches to different inventory models by considering the time value of money,
different inflation rtes for the internal and external costs, finite replenishment,
shortages, etc.
In this paper, we develop a deterministic inventory model for deteriorating items
with two-warehouses under inflation and time value of money. We allow for
shortages and complete backlogging, and assume that the inventory cost (including
holding cost and deterioration cost) in RW is higher than that in OW. The firm stores
goods in OW before RW, but clears the stocks in RW before OW follows a k-release
Two-warehouse Inventory Model for Deteriorating Items 85

rate. Even till now, most of the researchers have been either completely ignoring the
deterioration factor or are considering a constant rate of deterioration in the
warehouses, which is not possible practical. Since the effect of deterioration cannot be
ignored, have in one of the warehouse we considered time-varying deterioration and
in the other we have taken weibull distribution deterioration.

2. Assumptions and Notations

The mathematical model in this paper is developed based on the following
assumptions:
(1) Demand rate is deterministic and is a function of time.
(2) Shortages are allowed and completely backlogged.
(3) Deterioration rate in owned warehouse is time dependent.
(4) Deterioration rate of the item in rented warehouse follows a two parameter
Weibull distribution.
(5) There is no replacement or repair of deteriorating items during the period
under consideration.
(6) Production transactions are followed by instantaneous cash flow.
(7) The OW has a fixed capacity of W units and the RW has unlimited capacity.]
(8) The holding costs in RW are higher than those in OW.
(9) Inventory system is considered single item.
(10) Inflation and time value of money are considered.
(11) The transfer of stocks from RW to W follows a k-release rule.
(12) Lead-time is zero and the replenishment rate is infinite.
The following notations are used throughout the paper:
D (t) Demand rate where D (t) = a+bt, a and b are positive constants where a>b.
W Capacity of OW
R Amount of goods stored in RW
s Per unit selling price of the item
r Constant representing the difference between the discount rate and
inflation rate.
C Purchasing cost per unit item
Co Holding cost per unit per unit time in OW
Cr Holding cost per unit per unit time in RW, Cr>Co
C1 Shortage cost per unit per unit time
A Setup cost per cycle.
Ii(t) Inventory level at any time b, i = 1 for OW and i = 2 for RW.
M(t) Rate of deterioration in OW where M(t) = θt, θ is a positive constant where
0<θ<<1.
f(t) Two parameter probability density function for the rate of deterioration,
f(t) = αβ t ( ) where is the scale parameter (α > 0), β is the shape
− αtβ
β−1 e

parameter (β > 0).

86 S. R. Singh, Neeraj Kumar and Rachna Kumari

Z (t) Weibull instantaneous rate function for the stocked items in

f (t)
RW, Z ( t ) = αβt β−1
e −αtβ

3. Mathematical Model
In the development of the model, we assume that a company purchases S (S > W)
units out of which W units are kept in OW and (S–W) units are kept in RW. Initially,
the demands are not using the stocks of OW until the stock level drops to (W–K) units
at the end of T1. At this stage, K (K < W) units are transported from RW to OW. As a
result, the stock level of OW again becomes W and the stocks of OW are used to meet
further demands. This process is continued until the stock in RW is fully exhausted.
After the last shipment, only W units are used to satisfy the demand during the
interval [Tn-1, Tn] and then the shortages are allowed and completely backlogged
during the interval [Tn, T]. The graphical representation of the whole process is shown
in the figures below:
OW inventory system can be represented by the following differential equation:–
I11 ( t ) = −M ( t ) I1 ( t ) − D ( t ) , Ti ≤ t ≤ Ti +1 ….. (1)
With the boundary condition I1 (Ti) = W, i=0, 1, 2... n–1
For i=n, I1 (Ti) = 0 and
I11 ( t ) = −D ( t ) ,Tn ≤ t ≤ Ti+1 ….. (2)
With the boundary condition I1(Tn) = 0
Using the boundary conditions, the solution of equation (1) and (2) is given by
⎛ θ θ2 ⎞ ⎛ ⎛ T 2 − t 2 ⎞ θ 4 4 θ2 6 6 ⎞
I1 ( t ) eθt = a ⎜ Ti − t + ( Ti3 − t 3 ) + ( Ti5 − t 5 ) ⎟ + b ⎜ ⎜ i ⎟ + ( Ti − t ) + ( Ti − t ) ⎟⎟
2
/2
⎜
⎝ 6 40 ⎠ ⎝⎝ 2 ⎠ 8 48 ⎠

, Ti ≤ t ≤ Ti +1 ,i = 0,1, 2....n − 2 …..(3)

⎛ θ θ2 ⎞ ⎛ ⎛ T − t ⎞ θ 4 4 θ2 6 6 ⎞
2 2
I1 ( t ) eθt = a ⎜ Tn − t + ( Tn3 − t 3 ) + ( Tn5 − t 5 ) ⎟ + b ⎜ ⎜ ⎟ + ( Tn − t ) + ( Tn − t ) ⎟⎟
2
/2 n
⎜
⎝ 6 40 ⎠ ⎝⎝ 2 ⎠ 8 48 ⎠

, Tn ≤ t ≤ Ti +1 ,i = n − 1 …..(4)
and I1 ( t ) = a ( Tn − t ) +
2
( Tn − t )
1 2 2
,Tn ≤ t ≤ T …..(5)
Two-warehouse Inventory Model for Deteriorating Items 87

The RW inventory system can be represented by the following differential

equation:
I12 ( t ) = − Z ( t ) I 2 ( t ) ,Ti ≤ t ≤ Ti +1 ….. (6)
With the boundary condition I 2 ( Tn −1 ) = 0, and i=0,1,2..........n-2
Using the boundary condition, the solution of equation (6) is given by
I 2 ( t ) = R.e −αt , Ti ≤ t ≤ Ti +1
β
…..(7)
and I 2 ( t ) = ( I ( Ti ) − q ) e ( ) , T < t ≤ T , i=0,1,2.....n-2
β
α T − tβ
i
i i +1 …..(8)

1. Present worth set-up cost

Order is placed of the beginning of each cycle and hence for every cycle
SPC = A …..(9)

2. Present worth item cost

Inventory is bought at the beginning of the cycle and stored separately at the two
warehouses. Hence,
IC = SC …..(10)

3. Present worth holding cost in OW

Inventory is available during Ti ≤ t ≤ Ti +1 , i = 0,1, 2...............n − 1 , Hence the holding cost
needs to be computed during these time periods.
n −1 Ti+1

HCOW = ∑ CO e − rTi ∫ I (t) e

1
-rt
dt ….. (11)
i=0 Ti

4. Present worth holding cost in RW

Inventory is available during Ti ≤ t ≤ Ti +1 , i = 0,1, 2...............n − 2 . Hence the holding cost
needs to be completed during these time periods.
n−2 Ti+1

HCRW = ∑ Cr e − rTi
∫ I (t) e
2
-rt
dt ….. (12)
i=0 Ti

5. Present worth shortage cost in OW

Shortage occurs during the period Tn < t < T . Hence the shortage cost needs to be
completed during this time period.
&&&&
T
SCOW = C e ∫ ⎣⎡ −D ( t )⎦⎤ e
1 -rTn -rt
dt ….. (13)
Tn

6. Present worth Sales Avenue

Since the inventory is available for sale during Ti ≤ t ≤ Ti +1 , i = 0,1, 2...............n − 1 , profit
can be gained in this time only. The present worth of profit gained during this time is
obtained by the following expression,
n −1 Ti+1

SR = ∑ s e-rTi ∫ D(t) e
-rt
dt ….. (14)
i=0 Ti
88 S. R. Singh, Neeraj Kumar and Rachna Kumari

7. Present worth transportation cost

Inventory is transferred from the RW to OW at Ti , i=0,1,2.......... ( n-1) , therefore we have
n −1
TRC = Tc ∑
i =1
e-rTi ….. (15)
Present worth total profit:
The present worth net profit is found by deduction various form the sales profit.
Using the equations from 9 to 15,
P=SR–SPC–IC–HCOW–HCRW–SCOW–TRC
Here, our aim is to find that quantity, which should be stored in the RW, and the
number of times the inventory should be transferred from the RW to the OW so that
the net profit might be maximized.

4. Numerical Illustrations
For an inventory system, we considered the following data for solving the equations
of the model: θ = 0.01, C = 1, CO = 1, Cr = 1.5, T = 100, s = 20, A = 100
With these values we find different solutions of the system for integral values of n
i.e. 1, 2, ...5.
Example 1. a = 200, b = 5, α = 0.005, β = 2, W = 500

Table 1a: Time values for different number of cycles.

n T1 T2 T3 T4 T5 T6
1 1.8132 4.0742 – – – –
2 1.8132 3.5092 5.6519 – – –
3 1.8132 3.5092 5.1086 7.1519 – –
4 1.8132 3.5092 5.1086 6.6272 8.5872
5 1.8132 3.5092 5.1086 6.6272 8.078 9.9699

Table 1b: Optimal values for different number of cycles.

n R Cost Revenue Shortage Net Profit NP/T

Cost
1 381.2154 7432.5744 13627 966.5023 5227.9233 1283.1779
2 780.0307 10540.3737 16964 1953.1384 4470.4879 790.9708
3 1207.3 13436.3723 19591 2498.2347 3656.3923 511.2477
4 1674.4 16275.7224 21638 2739.1215 2623.1561 366.7775
5 2194.1 19224.5237 23257 2768.9548 1263.5215 126.7336
Two-warehouse Inventory Model for Deteriorating Items 89

1400
1200
Net profit / time

1000
800
600
Series1
400
200
0
0 1 2 3 4 5 6
Time value of different numbers of cycles

Fig.1
Example 2. a = 200, b = 5, α = 0.001, β = 2, W = 500

Table 2a: Time values for different number of cycles.

n T1 T2 T3 T4 T5 T6
1 1.8132 4.0742 – – – –
2 1.8132 3.5092 5.6519 – – –
3 1.8132 3.5092 5.1086 7.1515 – –
4 1.8132 3.5092 5.1086 6.6272 8.5872
5 1.8132 3.5092 5.1086 6.6272 8.078 9.9699

Table 2b: Optimal values for different number of cycles.

n R Cost Revenue Shortage Net Profit NP/T

Cost
1 376.2349 6633.4471 13627 966.5023 6027.0506 1479.3212
2 755.8814 9559.125 16964 1953.1384 5451.7366 964.5848
3 1140.8 12244.9656 19591 2498.2347 4847.7997 677.8338
4 1532.6 14783.2967 21638 2739.1215 4115.5785 479.2688
5 1932.9 17237.2918 23257 2768.9548 3250.7452 326.0559
90 S. R. Singh, Neeraj Kumar and Rachna Kumari

1600
1400
1200
Net profit / time

1000
800
600
Series1
400
200
0
0 1 2 3 4 5 6
Time value of different number of cycles

Fig.2
Example 3: a = 300, b = 5, α = 0.001, β = 2, W = 500

Table 3a: Time values for different number of cycles.

n T1 T2 T3 T4 T5 T6
1 1.231 2.8206 – – – –
2 1.231 2.4235 3.97 – – –
3 1.231 2.4235 3.5808 5.0878 – –
4 1.231 2.4235 3.5808 4.7061 6.177
5 1.231 2.4235 3.5808 4.7061 5.8021 7.2403

Table 3b: Optimal values for different number of cycles.

n R Cost Revenue Shortage Net Profit NP/T

Cost
1 375.5687 5929.1126 14706 - 9057.2717 3211.1153
2 752.7777 8669.7393 19116 1292.9461 9153.3146 2305.6208
3 1132.6 11265.7885 22753 2279.3241 9207.8874 1809.7974
4 1516 13755.91 25772 3164.1900 8851.9 1433.0419
5 1903.9 16170.81 28291 3642.4190 8478.5 1171.0150
Two-warehouse Inventory Model for Deteriorating Items 91

3500
3000
Net profit / time

2500
2000
1500
1000 Series1

500
0
0 1 2 3 4 5 6
Time value of different number of cycles

Fig.3
Example 4: a = 300. b = 5, α = 0.001, β = 2, W = 400.

Table 4a: Time values for different number of cycles.

n T1 T2 T3 T4 T5 T6
1 0.9886 2.2748 – – – –
2 0.9886 1.9359 3.1956 – – –
3 0.9886 1.9359 2.8798 4.1142 – –
4 0.9886 1.9359 2.8798 3.8034 5.0142
5 0.9886 1.9359 2.8798 3.8034 4.708 5.8967

Table 4b: Optimal values for different number of cycles.

n R Cost Revenue Shortage Net Profit NP/T

Cost
1 300.2933 4585.1273 12179 – 8842.4895 3887.1503
2 601.4198 6700.5474 16035 287.5635 9622.0161 3011.0202
3 903.9181 8740.196 19405 1459.4177 9205.3863 2237.4669
4 1208.3 10713.5188 22299 2344.5577 9240.9235 1842.9507
5 1515 12635.2517 24792 2997.0191 9159.7295 1553.3653
92 S. R. Singh, Neeraj Kumar and Rachna Kumari

4500
4000
3500
Net profit / time

3000
2500
2000
1500 Series1
1000
500
0
0 1 2 3 4 5 6
Time value of different number of cycles

Fig.4

5. Observation
(1) From example 1, we observe that as the number of cycle increases, the net profit
as well as net profit per unit time is found to decrease.
(2) From example 2, since the deterioration in the RW is decreasing from α = 0.005
to α = 0.001 and also it is observed that the net profit as well as net profit per
unit time is found to decrease for increasing number of cycles.
(3) From example 3, the time values of this example are comparatively very less
than the previous example 2, but since the demand has also increased, hence
there is no appreciable change in the value of required items. It is also observed
that as the number of cycles increases, the net profit increases from cycle 1 to 3,
but the net profit per unit time is found to be maximum for n = 1. Consecutively,
it is observed that the net profit as well as the net profit per unit time is found to
be decrease for increasing number of cycles.
(4) From example 4, we observe that as the storage capacity of OW is decreased, the
quantity to be ordered obviously decreases and the cost also goes down. But as
the time values have gone down, the net profit is found to be minimum for n = 1
and the net profit per unit time is found to be maximum for n = 1. At last it is
observed that the net profit as well as the net profit per unit time is found to
decrease for increasing the number cycles.

6. Conclusion
In this paper, an inventory model is developed for deteriorating items with two-
warehouse, permitting shortage under inflation and time-value of money. Holding
costs and deterioration costs are different in OW and RW due to different preservation
environments. The inventory costs (including holding cost and deterioration cost) in
RW are assumed to be higher than those in OW. To reduce the inventory costs, it will
Two-warehouse Inventory Model for Deteriorating Items 93

be economical for firms to store goods in OW before RW, but clear the stocks in RW
before OW. Most of the researchers have till now ignored the effects of deterioration
in both the warehouses or have considered a constant rate of deterioration. But we
have taken a linear time dependent deterioration rate in OW and weibull distribution
type deterioration rate in RW. The model is solved for different system parameters for
up to five cycles and the optimal solution is selected from amongst the available
solutions. The system is solved by using the mathematical software MATLAB 7.0.1.

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