Deterministic inventory lot-size models with shortages for fluctuating demand and unit purchase cost

Abstract

The classical economic order quantity (EOQ) model assumes not only a constant demand rate but also a fixed unit purchasing cost. In today's time-based competition, the unit cost of a high-tech product declines significantly over its short product life cycle while its demand increases. Therefore, using the classical EOQ formulation for a high-tech product will cause varying magnitudes of error. In addition, the cost of purchases as a percentage of sales is often substantial. Consequently, adding the purchasing strategy into the EOQ model is vital. In this paper, we assume that not only the demand function but also the unit purchase cost is fluctuating with time. We then provide an easy-to-use algorithm to find the optimal replenishment number and schedule. In a numerical example, we show that the total cost obtained by our proposed model is 32.4% less expensive than that obtained by the classical EOQ model.