Effects of inflation and time value of money on an inventory system with deteriorating items and partially backlogged shortages

Jaggi, C.; Khanna, A.; Nidhi, N.

Growing Science » International Journal of Industrial Engineering Computations » Effects of inflation and time value of money on an inventory system with deteriorating items and partially backlogged shortages

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International Journal of Industrial Engineering Computations

ISSN 1923-2934 (Online) - ISSN 1923-2926 (Print) Quarterly Publication Volume 7 Issue 2 pp. 267-282 , 2016

Effects of inflation and time value of money on an inventory system with deteriorating items and partially backlogged shortages Pages 267-282 Download PDF

Authors: Chandra K. Jaggi, Aditi Khanna, Nidhi Nidhi

DOI: 10.5267/j.ijiec.2015.10.003

Keywords: Deterioration, Finite planning horizon, Inflation, Inventory, Partial Backlogging, Time value of money

Abstract: As the long arm of the grinding, deep financial crisis continues to haunt the global economy, the effects of inflation and time value of money cannot be oblivious to an inventory system. Inflation, defined as a general rise in the prices of goods and services over a period of time, has monetary depreciation as one of its major side effects. And, since inventories correspond to substantial investment in capital for any organization, it would be unethical if the effects of inflation and time value of money are not considered while determining the optimal inventory policy. Moreover, deterioration of items is a phenomenon which cannot be ignored, as it may yield misleading results. Further, under the inflationary conditions, the different cost parameters including the price are bound to vary from cycle to cycle over the planning horizon. Another important factor is shortages which no retailer would prefer, and in practice are partially backlogged and partially lost. In order to convert the lost sales into sales, the retailer offers such customers an incentive, by charging them the price prevailing at the time of placing an order, instead of the current inflated price. Therefore, bearing in mind these facts, the present paper develops an inventory model for a retailer dealing with deteriorating items under inflationary conditions over a fixed planning horizon. The objective is to derive the optimal number of cycles and cycle length that maximizes the net present value of the total profit over a fixed planning horizon. An appropriate algorithm has been proposed to obtain the optimal solution. Finally, a numerical example is provided to illustrate the proposed model. Sensitivity analysis of the optimal solution with respect to major parameters is carried out and some managerial inferences have been presented.

How to cite this paper

 Jaggi, C., Khanna, A & Nidhi, N. (2016). Effects of inflation and time value of money on an inventory system with deteriorating items and partially backlogged shortages.International Journal of Industrial Engineering Computations , 7(2), 267-282.

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