Implications on managing inventory systems for products with stock-dependent demand and nonlinear holding cost via the adaptive EOQ policy

Abstract

Motivated by the incomplete information of inventory managers and the ease-of-implementation feature of the adaptive EOQ (AEOQ) policy, this paper investigates whether this policy is effective in managing inventory systems for products with stock-dependent demand and nonlinear holding cost when some underlying parameters are unknown. The effectiveness of the AEOQ policy is studied from both stability and profitability perspectives. Stability analysis shows that the iterative procedure may not be convergent. However, incorporating the exponential smoothing or weighted moving average methods into the AEOQ policy could benefit the stability of this policy. Moreover, the delay feedback control method could be used to stabilize this iterative procedure when fluctuations occur. Profitability analysis firstly introduces three objective functions and shows how the relative difference in each objective function between equilibrium and optimal order quantities is affected by key parameters. Then, by defining the AEOQ policy as an effective solution if the equilibrium order quantity could balance these objectives, this paper provides the conditions under which the AEOQ policy is effective. Finally, methods are developed for inventory managers to judge this effectiveness in terms of profitability. Results highlight the feasibility of this policy and provide some practical insights for retailers to use this policy properly.