Inventory model for items with imperfect quality under announced price increases

Abstract

Previous research for determining ordering policies in response to known announced price increases assumed that the items received were of perfect quality. However, in practice, the above assumption may not be true because the manufacturer’s production process quality is often not perfect. Therefore, the study develops a new model in response to an announced price increase, in which defectives could be screened out using a 100% inspection process and have different holding costs compared with the good items. Three situations, where the announced price increases become effective at any future specified time, occur for the optimal ordering strategies in which there is no need to calculate the new economic order quantity (EOQ) associated with the revised price. The study further develops a simple algorithm to determine a special order lot size and cost savings. In addition, an alternative method, called a critical price-increase index value, was developed to help determine whether to employ a special order or not. Finally, a numerical example to illustrate the proposed model and algorithm was provided. Key words: Ordering strategies, price increases, imperfect quality, inventory.