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Two-warehouse inventory model for deteriorating items with linear trend in

demand and shortages under inflationary conditions

Article  in  International Journal of Procurement Management · January 2010

DOI: 10.1504/IJPM.2010.029775

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54 Int. J. Procurement Management, Vol. 3, No. 1, 2010

Two-warehouse inventory model for deteriorating

items with linear trend in demand and shortages
under inflationary conditions

Chandra K. Jaggi* and Priyanka Verma

Department of Operational Research,
Faculty of Mathematical Sciences,
New Academic block, University of Delhi,
Delhi-110007, India
Fax: 91-11-27666672
E-mail: ckjaggi@yahoo.com E-mail: ckjaggi@or.du.ac.in
*Corresponding author

Abstract: Inflation plays a very interesting and significant role: it increases the
cost of goods. To safeguard from the rising prices, during the inflation regime,
the organisation prefers to keep a higher inventory, thereby increasing the
aggregate demand. This additional inventory needs additional storage space
that is facilitated by a rented warehouse. Ignoring the effects of time value of
money and inflation might yield misleading results. In the present study, a
‘two-warehouse inventory model with linear trend in demand under the
inflationary conditions’ has been developed. A rented warehouse (RW) is used
to store the excess units over the capacity of the own warehouse (OW). The
stock is being transferred from rented warehouse to own warehouse in a
continuous release pattern with per unit transportation cost being factored in.
The solution methodology provided in the model helps to decide on the
feasibility of renting a warehouse. The results have been elucidated with
numerical examples.

Keywords: inventory; warehouse; deterioration; shortages; inflation.

Reference to this paper should be made as follows: Jaggi, C.K. and Verma, P.
(2010) ‘Two-warehouse inventory model for deteriorating items with linear
trend in demand and shortages under inflationary conditions’, Int. J.
Procurement Management, Vol. 3, No. 1, pp.54–71.

Biographical notes: Chandra K. Jaggi is a Reader in the Department of

Operational Research, Faculty of Mathematical Sciences, University of Delhi,
India. He earned his PhD in Inventory Management, MPhil in Inventory
Management and Masters degree in Operational Research from Department of
Operational Research, University of Delhi. His teaching includes inventory
modelling and financial management. His research interest lies in modelling
inventory systems. He has publications in International Journal of Production
Economics, Journal of Operational Research Society, European Journal of
Operational Research, International Journal of Systems Sciences, Canadian
Journal of Pure & Applied Sciences, TOP, Opsearch.

Priyanka Verma is a Research Scholar in the Department of Operational

Research, Faculty of Mathematical Sciences, University of Delhi, India. She
has completed her MSc in Applied Operational Research in 2003 from
University of Delhi. At present she is pursuing her PhD in Operational
Research. Her area of interest is inventory management. She has three research

Copyright © 2010 Inderscience Enterprises Ltd.

 Two-warehouse inventory model for deteriorating items with linear trend 55

papers published in TOP (Spain), International Journal of Mathematics and

Mathematical Sciences (IJMMS) and International Journal of Operational
Research (IJOR) and one research paper is accepted under revision in
International Journal of Operational Research (IJOR).

1 Introduction

The traditional economic order quantity (EOQ) models assume an unlimited capacity of
the warehouse. Many reasons such as bulk purchase discounts, re-ordering costs,
seasonality of products, inflation induced demand, etc., force the buyer to order more
than the warehouse storage capacity. An additional storage facility, the rented warehouse
(RW), is used to store the excess units. The impact of time value of money and inflation
has received very little attention in the previous two-warehouse inventory models. This
paper deals with a two-storage inventory scenario with linear time dependent demand for
deteriorating items and completely backlogged shortages under inflation. The scheduling
period has been treated as variable and not constant. The solution procedure helps to
decide whether to rent a warehouse or not. Results have been validated with the help of
numerical examples followed by performance of sensitivity analysis.

2 Literature review

One of the important problems faced in inventory management is how to control and
maintain the inventories of items. The general assumption in classical inventory models
is that the available warehouse of the organisation has unlimited capacity. But practically
it is not possible as there exists many factors such as quantity discounts on bulk
purchases due to which the organisations are motivated to order more than that can be
stored in their own warehouse (OW). Hence in such situations it is economical to hire
another warehouse known as the RW. An early discussion on the effect of two-warehouse
was considered by Hartely (1976). Sarma (1987) developed a deterministic inventory
model with infinite replenishment rate. Goswami and Chaudhuri (1992) further
developed the model with or without shortages by assuming that the demand varies over
time with linearly increasing trend and that the transportation cost from RW to OW
depends on the quantity being transported. In their model, the stock was transferred from
RW to OW in an intermittent pattern. Sarma (1983) first developed a two-warehouse
model for deteriorating items with the infinite replenishment rate and shortages. Later
Pakkala and Achary (1992), Benkherouf (1997), Bhunia and Maiti (1998), Zhou (1998),
Kar et al. (2001), Zhou and Yang (2003), Lee (2006), Das et al. (2007), Dye et al. (2007),
Chung and Huang (2007), Niu and Xie (2008), Rong et al. (2008) and many more have
worked in the area of two-warehousing.
In the past many researchers worked on the inventory problems for deteriorating
items such as medicines, seasonal products and many others. Ghare and Schrader (1963)
first proposed an EOQ model for items having a constant rate of deterioration horizon.
Their work was extended by Covert and Philip (1973) by introducing variable rate of
deterioration. A further generalisation to the above models was proposed by Shah (1977)
56 C.K. Jaggi and P. Verma

by considering a model allowing complete backlogging of the unsatisfied demand. So

many researchers namely Dave and Patel (1981), Kang and Kim (1983), Sachan (1984),
Datta and Pal (1988), Aggarwal and Jaggi (1989), Shiue (1990), Hariga and Benkherouf
(1994), Hariga (1995), Chakrabarti and Chaudhuri (1997), Wee (1999), Papachristos and
Skouri (2003) and many more continued their research in the area of inventory
management for deteriorating items under various situations.
In all the above models, the time value of money and inflation were not considered
because of the belief that the time value of money and inflation would not effect
significantly the decisions regarding inventory management. But in real life the impact of
time value of money and inflation cannot be ignored while deciding the optimal
inventory policies. Buzacott (1975) developed an EOQ model under the impact of
inflation. Misra (1975) considered the effect of inflationary conditions on inventory
systems. Bierman and Thomas (1977) proposed the EOQ model considering the effect of
both inflation and time value of money. Several researchers have worked in this area like
Misra (1979), Vrat and Padmanabhan (1990), Datta and Pal (1991), Wee and Law
(1999), Wee and Law (2001), Yang et al. (2001), Yang (2004, 2006), Jaggi et al. (2006),
Hsieh et al. (2008), Dey et al. (2008) and many more.
However, none of the above models considered linear time dependent demand rate
and inflation in a two-warehouse system simultaneously. In this paper, a two-storage
inventory problem with linear time dependent demand for deteriorating items and
completely backlogged shortages under inflation is considered.

3 Assumptions and notations

The mathematical models of the two-warehouse inventory problems are based on the
following assumptions:
1 replenishment rate is infinite
2 lead time is zero.
3 shortages are allowed and completely backlogged
4 the OW has a fixed capacity of W units and the RW has unlimited capacity
5 the goods of RW are consumed only after consuming the goods kept in OW.
Notations adopted in this paper are as below:

R(t) demand rate which is a linear function of time t (a + bt, a, b > 0)

Q the replenishment quantity per replenishment
W the capacity of OW

Z the initial inventory for the period

α the deterioration rate in OW, where 0 < α < 1

β the deterioration rate in RW, where 0 < β < 1

 Two-warehouse inventory model for deteriorating items with linear trend 57

r discount rate, representing the time value of money

i inflation rate
R r – i, representing the net discount rate of inflation is constant

A replenishment cost per order for single warehouse system

A1 replenishment cost per order for two-warehouse system
c purchasing cost per unit
c1 transportation cost per unit of item moved from RW to OW
s the shortage cost per unit time
H the holding cost per unit per unit time in OW

F the holding cost per unit per unit time in RW, F > H
TC1 the present value of the total relevant cost per unit time in a single warehouse
system
TC2 the present value of the total relevant cost per unit time in a two warehouse system

I0(t) the inventory level in OW at time t

Ir(t) the inventory level in RW at time t
S(t) the shortage level at time t

tr the time at which the inventory level reaches zero in RW in two warehouse system
(in single warehouse system it is the time at which the inventory level reaches zero
in the OW)
t0 the time at which the inventory level reaches zero in OW in the two warehouse
system
ts the time at which shortage level reaches the lowest point in the replenishment cycle
in the two-warehouse system (in single warehouse system also it is the time at
which the shortage level reaches the lowest point).

4 Two warehouse model

At time t = 0, a lot size of Q units enter the system from which (Q – Z) units are delivered
towards backorders and the initial inventory for the period is Z. Out of these Z units, W
units are kept in OW and the rest (Z – W) units are stored in RW provided Z > W
otherwise zero units are stored in RW. The goods of OW are consumed only after
consuming the goods kept in RW. By time tr inventory level in RW reaches to zero due to
the combined effect of demand and deterioration and the inventory level W in OW also
reduces due to the effect of deterioration. By time t0, inventory level in OW reaches to
zero due to the combined effect of demand and deterioration. Now both the warehouses
58 C.K. Jaggi and P. Verma

get emptied and shortages build up until the end of the period T. The shortage quantity is
supplied to the customers at the beginning of the next cycle. The inventory situation can
be represented as shown in Figure 1.

Figure 1 Graphical representation of a two-warehouse inventory system

During the interval (0, tr), the inventory (Z – W) in RW reaches to zero due to the
combined effect of demand and deterioration and the inventory (W), kept in the OW also
reduces due to the effect of deterioration alone. Hence, the inventory level at time t at
RW and OW are governed by the following differential equations:

dI r ( t )
+ β I r ( t ) = − f ( t ) , 0 ≤ t ≤ tr , (1)
dt

with the boundary condition Ir(tr) = 0 and

dI 0 ( t )
+ αI 0 ( t ) = 0, 0 ≤ t ≤ tr , (2)
dt
with the initial condition I 0 ( 0 ) = W , respectively.
While during the interval (tr, t0), the inventory in OW reduces to zero due to the
combined effect of demand and deterioration both. So the inventory level at time t at
OW, I0(t), is governed by the following differential equation:

dI 0 ( t )
+ αI 0 ( t ) = − f ( t ) , tr ≤ t ≤ t0, (3)
dt
 Two-warehouse inventory model for deteriorating items with linear trend 59

with the boundary condition I0(t0) = 0. Similarly, during (t0, ts), the shortage level at time
t, S(t), is governed by the following differential equation:

dS ( t )
= f ( t ) , t0 ≤ t ≤ t s , (4)
dt
with the boundary condition S(t0) = 0.
The solutions to equations (1)–(4) are

I r ( t ) = ⎡⎣{β ( a + btr ) − b} exp {β ( tr − t )} − {β ( a + bt ) − b}⎤⎦ /β2 , 0 ≤ t ≤ tr , (5)

I 0 ( t ) = W exp ( −αt ) , 0 ≤ t ≤ tr , (6)

I 0 ( t ) = ⎡⎣{α ( a + bt0 ) − b} exp {α ( t0 − t )} − {α ( a + bt ) − b}⎤⎦ / α 2 , tr ≤ t ≤ t0 , (7)

⎛ bt 2 ⎞ ⎛ bt02 ⎞
S ( t ) = ⎜⎜ at + ⎟⎟ − ⎜⎜ at0 + ⎟ , t0 ≤ t ≤ t s , (8)
⎝ 2 ⎠ ⎝ 2 ⎟⎠

Using the condition Ir(t) = Z – W at t = 0 in equation (5) and S(t) = Q – Z at t = ts, we

have

Z = W + ⎡⎣{β ( a + btr ) − b} exp ( β tr ) − ( aβ − b ) ⎤⎦ /β2 (9)

and

⎛ bt 2 ⎞ ⎛ bt 2 ⎞
Q = Z + ⎜ ats + s ⎟ − ⎜ at0 + 0 ⎟ (10)
⎜ 2 ⎟⎠ ⎜⎝ 2 ⎟⎠
⎝
Using the continuity of I0(t) at t = tr, we know from equations (6) and (7) that

I 0 ( tr ) = We −αtr = ⎡⎣{α ( a + bt0 ) − b} exp {α ( t0 − tr )} − {α ( a + btr ) − b}⎤⎦ / α 2 (11)

which implies that

W = eαtr ⎡b − α ( a + btr ) + α ( a + bt0 ) e ( 0 r ) − be ( 0 r ) ⎤ / α 2

α t −t α t −t
(12)
⎣ ⎦
and
⎡
(
t0 = ⎢ − a − aαtr + bαtr2 +
⎢⎣
) {( a − aαtr + bαtr2 )
2
+ ( b + aα − 2bαtr )
(13)
( 2atr + btr2 − aαtr2 ) + 2W ( 1 − αtr + α 2tr2 /2 ) }⎤⎦ / ( b + aα − 2bαt ) r

From equation (13), we note that t0 is a function of tr, therefore, t0 is not a decision
variable.
Now, the present value of the inventory holding cost in RW and OW are
60 C.K. Jaggi and P. Verma

tr

∫
F e − Rt I r ( t ) dt
0

F ⎡ ⎛ e − Rtr eβ t r e − Rtr ⎞ bβ − Rt ( aβ − b ) ⎤
= ⎢ ( b − β ( a + bt ) ) ⎜
⎜ − − (
⎟⎟ + R 2 e
r
)
−1 − ⎥ (14)
⎝ (β + R ) (β + R )
r
β2 ⎢⎣ R ⎠ R ⎦

and
t0

∫
H e − Rt I 0 ( t ) dt
0

(
⎡W 1 − e−( α+ R )tr
) 1 ⎧⎪ α ( α ( a + bt0 ) − b ) e 0 αb − Rt0
− Rt
=H ⎢
⎢ ( α + R)
+ 2⎨
α ⎩⎪ R (α + R)
(
+ 2 e
R
− e− Rtr )
⎢⎣ (15)

+
( b − α ( a + btr ) ) e− Rtr − ( b − α ( a + bt0 ) ) eαt0 −( α+ R )tr ⎫⎪⎤⎥
⎬
R (α + R) ⎪⎭⎥⎦

respectively.
The present value of the shortage cost is

ts

∫
s e− Rt S ( t ) dt
t0

s ⎡ b − Rt0 ( a + bt0 ) − Rt0 ⎛ bt 2 ⎞ ⎛ bt 2 ⎞

= ⎢ 2 e
R ⎢⎣ R
( − e − Rts + )R
e + ⎜ at0 + 0 ⎟ e − Rts − ⎜ ats + s ⎟ e− Rts
⎜ 2 ⎟⎠ ⎜ 2 ⎟⎠
⎝ ⎝
(16)
e − Rts ⎤
− ( a + bts ) ⎥
R ⎥⎦

The amounts of deteriorated items in both RW and OW during (0, t0) are
tr t0

∫ ∫
β I r ( t ) dt and α I 0 ( t ) dt
0 0

Therefore, the present value of the cost for the deteriorated items is

⎡ tr t0 ⎤
∫ ∫
c ⎢β e I r ( t ) dt + α e− Rt I 0 ( t ) dt ⎥
− Rt
(17)
⎢ ⎥
⎣ 0 0 ⎦

The present value of the total relevant cost per unit time during the cycle (0, ts) is
 Two-warehouse inventory model for deteriorating items with linear trend 61

1 ⎡ F + β c ⎧⎪ ⎪⎧ e r
− Rt
eβtr e− Rtr ⎪⎫
TC 2 ( tr , ts ) = ⎢A+ ⎨( b − β ( a + bt ) ) ⎨ − − ⎬
⎪⎩ ( β + R ) ( β + R )
r
ts ⎢⎣ β2 ⎪⎩ R ⎪⎭

bβ ( aβ − b ) ⎪⎫
⎧
⎪W 1 − e
−( α+ R )tr
( )
+
R 2 (e − Rtr
−1 − ) R
⎬ + ( H + αc ) ⎨
⎪⎭ ( α + R ) α
1
+ 2
⎪
⎩
⎧⎪ ( α ( a + bt0 ) − b ) e − Rt0 αb ( b − α ( a + btr ) ) e− Rtr
⎨
R (α + R)
+ 2 e − Rt0 − e − Rtr +
R
( R
)
⎪⎩ (18)
( b − α ( a + bt0 ) ) eαt −( α+ R )t ⎫⎪⎪⎫ s ⎧ b − Rt
−
(α + R)
0 r

R ⎩ R
− Rt
⎬⎬ + ⎨ 2 e 0 − e s ( )
⎪⎪
⎭⎭
( a + bt0 ) ⎛ bt 2 ⎞ ⎛ bt 2 ⎞
+ e − Rt0 + ⎜ at0 + 0 ⎟ e− Rts − ⎜ ats + s ⎟ e− Rts
R ⎜ 2 ⎟⎠ ⎜ 2 ⎟⎠
⎝ ⎝
e − Rts ⎫⎪⎤
− ( a + bts ) ⎬⎥
R ⎪⎥
⎭⎦

and t0 is approximately related to tr through equation (13).

Figure 2 Graphical representation of the convexity of the cost function of a two warehouse
system (see online version for colours)

Graph-1 (tr=0.4) Graph-2 (tr=0.2)

232.5 241.5
241.0
232.0
240.5
231.5 240.0
239.5
231.0
239.0
230.5 238.5
0.82 0.84 0.86 0.88 0.9 0.92 0.94 0.64 0.66 0.68 0.7 0.72 0.74
ts ts

Graph-3 (tr=0.6) Graph-4 (ts=0.88)

Total cost per unit time (TC)

237.6 233.0
237.4 232.5
237.2
232.0
237.0
231.5
236.8
236.6 231.0
236.4 230.5
236.2 230.0
1.04 1.06 1.08 1.1 1.12 1.14 0 0.1 0.2 0.3 0.4 0.5
ts tr
62 C.K. Jaggi and P. Verma

Figure 2 Graphical representation of the convexity of the cost function of a two warehouse
system (continued) (see online version for colours)

Graph-5 (ts=0.90) Graph-6 (ts=0.86)

232.4 233.0
Total cost per unit time (TC)

232.2
232.0 232.5
231.8
231.6 232.0
231.4
231.2 231.5
231.0
230.8 231.0
230.6
230.4 230.5
0 0.1 0.2 0.3 0.4 0.5 0 0.1 0.2 0.3 0.4 0.5

tr tr

Figure 3 Graphical representation of a single warehouse inventory system

The optimal values of tr and ts for minimum present value of the total relevant cost per
unit time is any solution of the system
∂TC 2 ( tr , ts ) ∂TC 2 ( tr , ts )
= 0 and =0
∂tr ∂ts

which also satisfies the conditions

∂ 2TC 2 ( tr , ts ) ∂ 2TC 2 ( tr , ts )
>0, > 0 and
∂tr2 ∂ts2

⎛ ∂ 2TC 2 ( tr , ts ) ⎞⎛ ∂ 2TC 2 ( tr , ts ) ⎞ ⎛ ∂ 2TC 2 ( tr , ts ) ⎞

⎜ ⎟⎜ ⎟−⎜ ⎟ > 0.
⎜ ∂ t 2 ⎟⎜ ∂ t 2 ⎟ ⎜ ∂t ∂t ⎟
⎝ r ⎠⎝ s ⎠ ⎝ r s ⎠
Using these optimal values of tr and ts, the optimal values of Z, Q and the minimum
average cost can be obtained from (9), (10) and (18) respectively.
Graphically we have shown below that the cost function is convex.
 Two-warehouse inventory model for deteriorating items with linear trend 63

5 Single warehouse model

At time t = 0, a lot size of Q units enter the system from which (Q – Z) units are delivered
towards backorders and the initial inventory for the period is Z. By time tr inventory level
reaches zero due to the combined effect of demand and deterioration and there after the
shortages begin to accumulate and continue up to ts. The shortage quantity is supplied to
the customers at the beginning of the next cycle. The inventory situation in single
warehouse system can be represented as shown in Figure 3.
As described in the two warehousing section, the present value of the total relevant
cost per unit time can be obtained as follows

⎡ 1 H + αc ⎧⎪ ⎪⎧ e r
− Rt
eβtr e− Rtr ⎪⎫
TC1( tr , ts ) = ⎢A+ ⎨ ( b − α ( a + bt ) ) ⎨ − − ⎬
⎩⎪ ( α + R ) ( α + R )
r
⎢⎣ts α 2 ⎩⎪ R ⎭⎪

( aα − b ) ⎪⎫ s ⎪⎧ b − Rtr − Rts ( a + btr ) − Rtr

bα
R
(
+ 2 e− Rtr − 1 − ) ⎬+ ⎨
R ⎪⎭ R ⎪⎩ R 2
( e −e) +
R
e (19)

⎛ bt 2 ⎞ ⎛ bt 2 ⎞ e− Rts ⎫⎪⎤
+ ⎜ atr + r ⎟ e− Rts − ⎜ ats + s ⎟ e− Rts − ( a + bts ) ⎬⎥
⎜ 2 ⎟⎠ ⎜ 2 ⎟⎠ R ⎭⎪⎥⎦
⎝ ⎝
where

Z = ⎡⎣{α ( a + btr ) − b} exp ( αtr ) − ( aα − b ) ⎤⎦ /α 2 (20)

and

⎛ bt 2 ⎞ ⎛ bt 2 ⎞
Q = Z + ⎜ ats + s ⎟ − ⎜ at0 + 0 ⎟ (21)
⎜ 2 ⎟⎠ ⎜⎝ 2 ⎟⎠
⎝

The optimal values of tr and ts for minimum present value of the total relevant cost per
unit time is any solution of the system

∂TC1( tr , ts ) ∂TC1( tr , ts )
= 0 and =0
∂tr ∂ts

which also satisfies the conditions

∂ 2TC1( tr , ts ) ∂ 2TC1( tr , ts )
> 0, > 0 and
∂tr2 ∂ts2

⎛ ∂ 2TC1( tr , ts ) ⎞⎛ ∂ 2TC1( tr , ts ) ⎞ ⎛ ∂ 2TC1( tr , ts ) ⎞

⎜ ⎟⎜ ⎟−⎜ ⎟ > 0.
⎜ ∂tr2 ⎟⎜ ∂ts2 ⎟ ⎜ ∂tr ∂ts ⎟
⎝ ⎠⎝ ⎠ ⎝ ⎠

Using these optimal values of tr and ts, the optimal values of minimum average cost, Z,
and Q can be obtained from (19), (20) and (21).
Graphically we have shown below that the cost function is convex.
64 C.K. Jaggi and P. Verma

Figure 4 Graphical representation of the convexity of the cost function of a single warehouse
system (see online version for colours)

Graph-7 (t1=0.33) Graph-8 (t1=0.31)

280.5 292.0

280.0 291.0
279.5
290.0
279.0
289.0
278.5

278.0 288.0

277.5 287.0
0.46 0.48 0.5 0.52 0.54 0.56 0.58 0.46 0.48 0.5 0.52 0.54 0.56 0.58

T T

Graph-9 (t1=0.35) Graph-10 (T=0.52)

275.0 300.0
274.0 295.0
273.0
290.0
272.0
285.0
271.0

270.0 280.0

269.0 275.0
0.46 0.48 0.5 0.52 0.54 0.56 0.58 0 0.1 0.2 0.3 0.4

T t1

Graph-11 (T=0.49) Graph 12 (T=0.46)

260.0 260.0

255.0 255.0

250.0 250.0

245.0 245.0

240.0 240.0

235.0 235.0
0 0.1 0.2 0.3 0.4 0 0.1 0.2 0.3 0.4

t1 t1

6 Solution procedure

Now, depending on the total costs computed from single warehouse and two warehouse
systems, decision is made whether to rent a warehouse or not. In order to find the optimal
total cost and the order quantity we propose the following algorithm:
Step 1 Solve single warehouse model and find the cost per unit time (TC1) using
equation (19), order quantity equation (21) and the cycle time.
Step 2 If order quantity of single warehouse model is less than the capacity of the OW
then solve two-warehouse model using Step 3.
 Two-warehouse inventory model for deteriorating items with linear trend 65

Step 3 Now calculate the cost per unit time (TC2) using equation (18), order quantity
equation (10) and the cycle time of the two-warehouse system.
Step 4 Now if the cost per unit time of RW (TC2) is less than the cost per unit time of
OW (TC1) then it is economical to use RW otherwise SW system is considered.
Corresponding values of tr, ts, Z and Q are also considered.

7 Examples

Here we have demonstrated the model under two scenarios. Firstly, we assume that the
deterioration rate in RW is greater than that of OW. Secondly, it’s opposite i.e.,
deterioration rate in RW is smaller than that of OW. Under these conditions, total cost
have been computed for different values of demand parameters (a and b) for the single as
well as the two-warehouse system. Now, depending on the total costs computed from
both the systems, decision is made whether to rent a warehouse or not.

Example 1
Let c = 10, H = 0.3, F = 0.5, A = 90, A1 = 110, s = 5, c1 = 0.20, W = 100,
α = 0.02, β = 0.05, R = 0.06 in appropriate units.
The optimum values of tr, ts and minimum average cost have been computed for
different values of a and b. Results are illustrated in Table 1.

Table 1 Optimal solution of the model for different values of demand parameters when α < β.

a b TC1 TC2 Use RW? tr ts Z Q

200 5 175.1 177.5 No 0.49 0.67 100.0 136.5
10 176.1 179.1 No 0.49 0.67 100.0 136.7
15 177.1 180.8 No 0.49 0.67 100.0 136.9
20 178.1 182.3 No 0.49 0.66 100.0 137.1
250 5 207.3 204.9 Yes 0.41 0.97 201.4 245.6
10 208.1 206.2 Yes 0.41 0.96 202.4 246.4
15 208.9 207.6 Yes 0.40 0.95 203.5 247.2
20 209.7 208.9 Yes 0.40 0.94 204.6 248.0
300 5 238.2 230.6 Yes 0.40 0.88 217.8 267.1
10 238.9 231.8 Yes 0.39 0.87 218.7 267.7
15 239.5 232.9 Yes 0.39 0.87 219.6 268.4
20 240.2 234.0 Yes 0.38 0.86 220.6 269.2

One can easily conclude from Table 1 that as the base sales (a) increases there is a steep
rise in the order quantity. Now, in order to take advantage of this increased sale, it is
economical for the decision maker to order more quantity and go for a RW. However,
when slope to the demand function (b) increases for fixed base sales (a), there is a slight
upward movement of demand, which ultimately increases the order quantity and total
cost per unit time marginally.
66 C.K. Jaggi and P. Verma

Example 2
Let c = 10, H = 0.3, F = 0.5, A = 90, A1 = 110, s = 5, c1 = 0.20, W = 100,
α = 0.05, β = 0.02, R = 0.06 in appropriate units.
The optimum values of tr, ts and minimum average cost have been computed for
different values of a and b. Results are shown in Table 2.

Table 2 Optimal solution of the model for different values of demand parameters when α > β

a b TC1 TC2 Use RW? tr ts Z Q

200 5 186.6 190.5 No 0.49 0.68 100.0 138.9
10 187.6 192.3 No 0.49 0.68 100.0 139.1
15 188.7 193.9 No 0.49 0.67 100.0 139.3
20 189.7 195.5 No 0.48 0.67 100.0 139.5
250 5 218.3 216.5 Yes 0.50 1.06 221.8 268.7
10 219.2 217.9 Yes 0.49 1.05 223.2 269.8
15 220.0 219.3 Yes 0.48 1.03 224.7 271.1
20 220.8 220.7 Yes 0.48 1.02 226.2 272.4
300 5 248.8 240.8 Yes 0.49 0.97 243.0 294.8
10 249.5 242.0 Yes 0.48 0.96 244.3 295.8
15 250.1 243.2 Yes 0.47 0.95 245.6 296.9
20 250.8 244.4 Yes 0.47 0.94 247.0 298.1

Based on the computational results shown in Table 2, we obtain some managerial

insights. The higher the value of demand parameter (a), keeping another demand
parameter (b) fixed, results in higher order quantity and total cost, which implies that this
has a direct impact on the demand. On the other hand, when the value of demand
parameter (b) increases which signifies that the slope of the demand function moves
slightly upwards keeping another demand parameter (a) unchanged, eventually increasing
the order quantity and total cost marginally.

8 Sensitivity analysis

The different parameters may happen to change due to uncertainties in different

decision-making situations. To analyse these changes, the sensitivity analysis might be of
great help. Using the numerical example presented above, the sensitivity analysis of
parameters R and α (Table 3) and R and β (Table 4) has been done.
One can conclude from Table 3 that as the net discount rate decreases (R), keeping
the deterioration rate in the OW (α) as constant, there is an increase in the order quantity
and the total cost per unit time which implies that it is economical for the decision maker
to order more in order to take advantage of rising inflation. Whereas, if the deterioration
rate in the OW (α) increases then the decision maker orders less so that the loss due to
deterioration can be minimised.
 Two-warehouse inventory model for deteriorating items with linear trend 67

Results obtained in Table 4 shows that at any constant level of deterioration rate in
the RW (β) and a decrease in R (net discount rate), forces the decision maker to order
more as his cycle length increases due to inflation. Moreover, for any fixed value of R
(net discount rate), when the deterioration rate increases in the RW (β), results in an
increase in the total cost because a rise in α or β causes an increase in the cost of
deteriorating units which ultimately increase the total cost.

Table 3 Impact of R and α on the optimal replenishment policy

R↓ α→ 0.02 0.03 0.04

0.08 tr 0.39 0.38 0.37
ts 0.87 0.86 0.85
to 0.72 0.70 0.69
Z 218.9 215.4 211.8
Q 264.4 262.1 260.8
TC 230.0 236.4 242.8
0.06 tr 0.39 0.38 0.37
ts 0.87 0.86 0.86
to 0.72 0.71 0.69
Z 219 215.4 211.9
Q 266.2 263.9 261.7
TC 230.6 237.1 243.5
0.04 tr 0.39 0.38 0.37
ts 0.88 0.87 0.86
to 0.72 0.71 0.69
Z 219.8 216.3 212.7
Q 267.7 265.5 263.3
TC 231.2 237.7 244.1
0.02 tr 0.40 0.39 0.37
ts 0.88 0.87 0.87
to 0.72 0.71 0.70
Z 220.6 217.1 213.6
Q 269.2 267.1 264.9
TC 231.8 238.3 244.8
0 tr 0.40 0.39 0.38
ts 0.89 0.88 0.87
to 0.73 0.71 0.70
Z 221.4 218.0 214.5
Q 270.8 268.7 266.6
TC 232.0 238.5 244.9
68 C.K. Jaggi and P. Verma

Table 4 Impact of R and β on the optimal replenishment policy

R↓ β→ 0.03 0.05 0.07

0.08 tr 0.47 0.39 0.34
ts 0.94 0.87 0.82
to 0.79 0.72 0.67
Z 241.3 218.9 202.8
Q 286.1 265.8 250.0
TC 223.6 230.0 234.9
0.06 tr 0.47 0.39 0.34
ts 0.94 0.87 0.82
to 0.79 0.72 0.67
Z 241.5 219.0 202.9
Q 287.5 266.2 251.0
TC 224.2 230.6 235.5
0.04 tr 0.47 0.39 0.34
ts 0.95 0.88 0.83
to 0.80 0.72 0.67
Z 242.6 219.8 203.5
Q 289.3 267.7 252.3
TC 224.9 231.2 236.1
0.02 tr 0.47 0.40 0.34
ts 0.96 0.88 0.83
to 0.80 0.72 0.67
Z 243.7 220.6 204.1
Q 291.2 269.2 253.6
TC 225.5 231.8 236.7
0 tr 0.48 0.40 0.34
ts 0.96 0.89 0.84
to 0.80 0.73 0.67
Z 244.8 221.4 204.7
Q 293.1 270.8 255.0
TC 225.7 232.0 236.9

9 Conclusions

A major inventory problem is to how, when and where to stock the goods. Usually it is
assumed that the warehouse has unlimited capacity. But due to various factors like
inflation-induced demand, etc. the organisation orders more than the capacity of the OW.
To store these excess units, an extra storage space is required which is termed as a RW.
So, an optimal replenishment policy is to be decided whether to rent a warehouse or not.
 Two-warehouse inventory model for deteriorating items with linear trend 69

Here, a two-warehouse inventory model has been presented by incorporating some of the
realistic phenomenon viz. deterioration, linear trend in demand, stock outs and inflation,
assuming that the stock is transferred from RW to OW in a continuous release pattern and
associating the unit transportation cost for the units being transported. Moreover, holding
cost in RW is considered to be higher than that of OW along with the different rates of
deterioration at either warehouse. A solution procedure has also been presented, which
helps the decision maker to decide under what circumstances he has to rent a warehouse.
Findings have also been validated with the help of some numerical examples. Sensitivity
analysis has also been performed on the net discount rate (R) and the different
deterioration rates (α, β) of both the warehouses which indicates that for the constant
level of deterioration rate at both the warehouses and an increase in R, reduces the total
cost because increase in R implies that the inflation rate decreases. On the other hand, for
any fixed value of R, as the deterioration rate increases at either warehouse, it results in
an increase in the total cost, since there is a rise in the cost of deteriorating units which
ultimately helps the decision maker to arrive at better decision.
A future study would be to extend the proposed model for:
1 finite replenishment rate
2 backorders which are partially backlogged
3 price dependent demand
4 stock dependent demand and many more.

Acknowledgements

The authors are thankful to the editor and anonymous referees for their constructive
comments and valuable suggestions that has led to the improvement of the paper.
The first author would like to acknowledge the support of the Research Grant No.
Dean(R)/R&D/2008/230, provided by the University of Delhi, Delhi, India for
conducting this research. The second author would like to thank the University Grant
Commission (UGC) for providing the fellowship to accomplish the research.

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