Profitability ratio maximization in an inventory model with stock-dependent demand rate and non-linear holding cost

Abstract

• A ( r, S )-type inventory system with profitability ratio maximization is studied. • The demand rate depends on the stock-level. • The holding cost is non-linear in both time and stock level. • The optimal inventory policy is obtained in a closed form. • A complete sensitivity analysis of the optimal solution with respect to all the parameters of the model is developed. This paper studies a deterministic inventory model with a stock-dependent demand pattern where the cumulative holding cost is a non-linear function of both time and stock level. When the monetary resources are limited and the inventory manager can invest his/her money in buying different products, it seems reasonable to select the ones that provide a higher profitability. Thus, a new approach with the aim of maximizing the profitability ratio (defined as the profit/cost quotient) is considered in this paper. We prove that the profitability ratio maximization is equivalent to minimizing the inventory cost per unit of an item. The optimal policy is obtained in a closed form, whose general expression is a generalization of the classical EOQ formula for inventory models with a stock-dependent demand rate and a non-linear holding cost. This optimal solution is different from the other policies proposed for the problems of minimum cost or maximum profit per unit time. A complete sensitivity analysis of the optimal solution with respect to all the parameters of the model is developed. Finally, numerical examples are solved to illustrate the theoretical results and the solution methodology.