An optimal replenishment policy for decaying items with shortages and salvage value

Abstract

This paper presents an optimal replenishment policy for decaying items with partial backlogging. The salvage value is incorporated into deteriorated units. By allowing shortages as backlogging, the impact on the cost from the decay of the products can be balanced out. In this study, shortages are allowed and partially backlogged. Expressions for various optimal indices as well as cost analysis are provided. Furthermore, we establish some useful theorems to characterize the optimal solution to determine the values of shortage point, cycle length and ordering quantity in order to minimize the cost. A numerical example is presented to illustrate the procedure. Finally some important managerial insights are also inferred from the sensitivity analysis of the optimal solution with respect to the major parameters of the system. It is observed that incorporating the salvage value results in a reduced total cost of the inventory system.