Optimal order quantities and prices with storage space and inventory investment limitations

Abstract

This study deals with a modified multi-item Economic Order Quantity (EOQ) model where profit-maximizing prices and order quantities are determined. Unit purchase cost is assumed to be a continuous decreasing function of the order quantity. It is also assumed that demand is inversely related to the price. We consider two types of resource—(i) storage space and (ii) inventory investment budget. The problem is formulated as a difficult nonconvex programming problem. We propose a solution method, based on Lagrangean duality and Geometric programming, which guarantees global optimality of solutions. Computational experience of the solution method indicates that computing requirements are reasonable and grow almost linearly with the problem size. Managerial implications are also provided through a sensitivity analysis.