A Joint Economic Production Lot Size Model for a

Deteriorating Item with Decreasing Warehouse Rental

Overtime

Jonas C.P. Yu

Logistics Management Department, Takming College, Taipei 114, Taiwan

jonasyu@takming.edu.tw

Abstract. In real life, the capacity of any distributor’s warehouse is limited.

Excess stock must be held in a rented warehouse whenever the capacity of the
distributor’s own warehouse is insufficient. Furthermore, we also choose to store
in the rented warehouse if it has better facilities and/or a lower cost. In this paper,
we consider a single-producer–single-distributor inventory model with
deteriorating items in a two-warehouse environment. The rented warehouse
normally has better facilities for preservation as compared with one’s own
warehouse. Besides, there is an incentive offered by a rented warehouse that
allows the rental fee to decrease over time. The incentive mechanism can be
proved to perform better than the one without incentive. The object of this study
is to develop an optimal joint economic lot size (JELS) policy from the
perspectives of the producer and the distributor. Moreover, a criterion to consider
the length of time of rented warehouse usage is proposed. Simulated Annealing
(SA) method has been developed to find the global optimum for a complex cost
surface through stochastic search process. A computer program in C-language
has been developed for this purpose and is implemented to derive the optimum
decision for the decision maker. Numerical examples and sensitivity analyses are
given to illustrate the results.

Keywords: Inventory; Deteriorating items; Two-warehouse; JELS; Simulated

annealing.

1 Introduction
A supply chain is a logistic network consisting of suppliers, distribution centers, and
retailer outlets, as well as raw materials, the work-in-process inventory and the finished
goods that flow in the facilities. Many researchers have gone into this field of study,
and plenty of resources have been invested in improving the supply chain management
(SCM) system. The different facilities develop their partnership through information
sharing and strategic alliances, in order to achieve long-term benefits and global
optimum of the system. Collaboration of enterprises, especially in terms of developing
strategies, is vital in reducing the overall cost of the enterprise. This is because
decisions made independently by individual players will not result in global optimum.
Global optimum will only be realized if the perspectives of all players are considered.

O. Gervasi and M. Gavrilova (Eds.): ICCSA 2007, LNCS 4705, Part I, pp. 818–831, 2007.
© Springer-Verlag Berlin Heidelberg 2007
 A Joint Economic Production Lot Size Model for a Deteriorating Item 819

The joint economic lot size (JELS) approach has been studied for years. It is well used
in the multi-echelon SCM system. Goyal [4] first considered an integrated inventory
model for the single-supplier single-customer problem.
Research in the management of deteriorating items is important because in real life,
deterioration of items on stock is considerable. In this study, deterioration is assumed to
depend on the condition of the on-hand inventory within the whole supplier chain. In
order to reduce loss due to deterioration of the products, the members of the supply
chain frequently implement a joint decision on the optimal number of deliveries. Ghare
and Schrader [3] were the first authors to consider on-going deterioration of inventory.
Since then, several researchers [14,15] have studied deteriorating inventory. Later,
Yang and Wee [17] developed an integrated economic ordering policy of deteriorating
items for a vendor and multiple-buyers.
In real life, most enterprises probably purchase more goods than can be stored in
their own warehouse (abbreviated as OW). The excess quantities are usually stored in
an additional storage space, known as the rented warehouse (abbreviated as RW). Quite
a lot of researchers have shown interest in this field of study and many companies also
face this critical issue in practice. Hartely [5] was the first author to consider the effect
of a two-warehouse model in inventory research and developed an inventory model
with a RW storage policy. Sarma [11] developed a two-warehouse model for
deteriorating items with an infinite replenishment rate and shortages. Later, Sarma [12]
developed a model for a single deteriorating item where both the demand rate and the
deterioration rate are assumed to be constant over a fixed scheduling period. Then,
Sarma and Sastry [13] developed a deterministic inventory model with an infinite
production rate, permissible shortage and two levels of storage. Pakkala and Achary [7]
developed a two-warehouse probabilistic order level inventory model for deteriorating
items. Pakkala and Achary [8] further considered the two-warehouse model for
deteriorating items with a finite replenishment rate and shortages. Pakkala and Achary
[9] also developed a discrete-in-time model for deteriorating items with two
warehouses. Ishii and Nose [6] investigated the optimal ordering policies for a
perishable product with different types of customers’ priorities, different selling prices
and the OW capacity constraint. Benkherouf [1] extended Sarma’s model and relaxed
the assumptions of a fixed cycle length and a specified quantity to be stocked in OW.
He found the optimal schedule that minimized the total cost per unit time in a cycle for
an arbitrary demand rate function. Bhunia and Maity [2] analyzed a deterministic
inventory model with linearly increasing demand, shortages and different levels of item
deterioration in both warehouses. Zhou [18] developed a deterministic model with
multiple warehouses possessing limited storage capacity. The demand rate is a function
of time. The model allows a shortage in OW. Yang [16] developed a two-warehouse
inventory model with constant deteriorating items, a constant demand rate and
complete shortages.
Unlike previous researches, our study considers the perspectives of both the
producer and the distributor and develops an integrated deteriorating inventory model
with decreasing warehouse rental to minimize the total cost of the system. Decreasing
warehouse rental is common in practice; it motivates long-term partnership with RW.
Since RW normally has better preserving facilities as compared with OW, we assume it
has a lower deterioration rate. In order to reduce the inventory costs, the enterprises
usually store goods in OW before RW, and clear the stocks in RW before OW. But after
820 J.C.P. Yu

long storage, if the rent cost is less in RW than in OW due to the incentive mechanism
offered by RW, enterprises may switch to store goods in RW instead of OW, and clear
the stocks in OW before RW.
The integrated two-echelon inventory model for deteriorating items is assumed to
have a constant demand rate and a limited distributor storage capacity. We assume that
there is a fixed part of the warehouse reserved for deteriorating items, because the
capacity of a warehouse is generally designed on a multi-item level. For deteriorating
items, temperature-controlled facilities must be installed in a fixed area of the
distribution warehouse to preserve them. The production rate is finite and shortages are
not allowed. The system under different environments has been preferred to derive the
minimum joint cost with a low-technology solution instead of more sophisticated OR
modeling. We propose a simple SA algorithm to solve the integrated two-echelon
deteriorating inventory model. The optimum inventory and scheduling period are
evaluated. A numerical example and sensitivity analysis of the joint cost policy are
given to illustrate the theory.

2 Assumptions and Notation

The mathematical model developed in this paper is based on the following
assumptions:
1. The planning horizon is finite and composed of several equal-length time periods.
2. Single item, one order and multi-delivery are assumed.
3. The demand rate is constant and known.
4. The production rate is deterministic.
5. No replacement of deteriorated items is considered.
6. No shortage is allowed.
7. The stationary policy has a constant distributor order size.
8. The replenishment of the distributor is instantaneous; the related transporting time
can be neglected.
9. There is a limited storage capacity for the distributor.
10. The storage priority policy is to use OW first, and then RW if stock exceeds the
capacity of OW.
11. The dispatching priority policy depends on the warehouse holding cost.
The following notation is used in this study
q Lot size per delivery from the producer to the distributor
W Available storage capacity in OW
T Length of the planning horizon or the duration with order cycle time
t Planning time
n Number of shipments delivered from the producer to the distributor during the
planning horizon T
TC Joint cost
I(t) Inventory level at time t
θ1 Deterioration rate of producer
θ2 Deterioration rate in OW
θ3 Deterioration rate in RW
d Demand rate (unit/unit time)
 A Joint Economic Production Lot Size Model for a Deteriorating Item 821

p Production rate (unit/unit time), p>d

CR Replenishing cost per cycle for the distributor ($/cycle)
C0 Basic administration cost in RW
HRo Holding cost for the distributor in OW ($/unit/ year)
HRr Holding cost for the distributor in RW ($/unit/ year)
PR Cost of deteriorated unit for the distributor ($/unit)
F Delivery cost per delivery for the producer ($/delivery)
CS Set-up cost per set-up for the producer ($/set-up)
PM Cost of deteriorated unit for the producer ($/unit)
HM Holding cost for the producer ($/unit/ year)

3 Mathematical Modeling and Formulation

This study develops an integrated two-echelon inventory model for a deteriorating item
under a two-warehouse environment. A producer manufactures products at a fixed-time
interval and then delivers them to a distribution center instantaneously. The model
considers the following scenario. The excess stocks will be sent to the rented
warehouse, when the storage capacity of OW is less than the delivered lot size
(i.e. q > W ). The rental fee in the RW decreases with the length of storage. The
integrated logistics flow is shown in Figure 1. Our objective is to develop a model to
find the optimal production lot size of the two-echelon supply chain.

Distributor Distributor
Finished Goods
Own Rented
Warehouse
Producer Warehouse
Demand
Finished Goods
Demand

Finished Goods
Distributor Retailer
Demand

Fig. 1. The integrated supply chain system

3.1 The Producer’s Inventory System

IM(t) is the producer’s finished goods inventory level at time t. The producer’s
inventory system in Figure 2 is depicted by the following differential equation:
822 J.C.P. Yu

Inventory
Level

Ptp
q
IM (t )

Time
T1 tp

Fig. 2. Inventory level of finished goods

dI M (t )
= p − θ1 I M (t ) , 0 ≤ t ≤ tp , t p = T1 − t m (1)
dt
Where tm is the production lead time and OW is used up at time T1. With the various
boundary conditions IM(0)=0 and IM(tp)=q, one has

I M (t ) =
p
θ1
[ −θ t
1− e 1 ] , 0 ≤ t ≤ tp (2)

From equation (2), the production cycle time is

1 ⎡ p ⎤
t p = t p ( q) = ln ⎢ ⎥ and 0 ≤ q ⋅ θ 1 < p (3)
θ1 ⎣ p − qθ 1 ⎦
The producer’s inventory cost during the planning horizon T, TCM, is the sum of the
transporting cost (TRc), the set-up cost (SC), the holding cost (HCM) and the
deteriorating cost (DCM). One has

TCM (q, n) = SC + TRc + HCM + DCM

= CS + Fn + ( pt p − q) + ( ptp − q) PM n
HM n (4)

θ1

3.2 The Distributor’s Inventory System

A distributor’s deteriorating inventory system with OW and RW is depicted in

Figure 3. The inventory level in OW, dIRo(t), during an infinitesimal time, dt, is a
 A Joint Economic Production Lot Size Model for a Deteriorating Item 823

Inventory
Level

q
˜˥̅ʻ̇ʳʼ

W ˜˥̂ʻ̇ʳʼ

˜˄

Time
̇˄ ˧˄
Fig. 3. Inventory level of the distributor with retailer demand

θ
function of the deterioration rate 2, the demand rate d and the inventory level IRo(t).
The inventory level in RW, dIRr(t), during an infinitesimal time, dt, is a function of the
θ
deterioration rate 3, the demand rate d and the inventory level IRr(t). This shows that
when the delivery lot size q is greater than the available capacity of OW, the excess
stocks are to be kept in RW. The rent consists of a basic administration fee and holding
cost. Based on a common practice, RW has an incentive policy if stock is kept for a
longer period. The following analysis illustrates the incentive policy:
(i) The administration cost for contract time t is assumed to be

⎧C 0 , 0 < t < t min

⎪
C (t ) = ⎨ C 0
⎪ t , t min ≤ t
⎩
where tmin is the least storage time desired by RW.
(ii) The unit holding cost decreases by u% per unit of time; the unit holding cost per unit
of time at time t is h(t).

⎧⎪H Rr ⋅ e −αt , 0 ≤ t ≤ t max

h(t ) = ⎨
⎪⎩H 0 , t max < t

where tmax is the longest storage time desired by RW and α is given by

α = − ln(1 − u / 100) . The relation of h(t) with various times is depicted in Figure 4.
824 J.C.P. Yu

H Rr

H Rr e −αT1

H Rr e −2αT1

H Rr e− kαT1
H0

Fig. 4. Unit holding cost decreases with time

IRr(t) is the distributor’s inventory level in RW at time t. The change in inventory

level of RW is formulated as
dIRr (t)
= −d − θ3I Rr (t) , 0 ≤ t ≤ t1 (5)
dt
where the rented warehouse is used up at time t1. From the above differential equations,
after adjusting for constant of integration with the various boundary conditions:
IRr(0)=qr=q-W and IRr(t1)=0, one has

I Rr (t ) =
θ3
[
d θ3 ( t1 − t )
e −1 ] , 0 ≤ t ≤ t1 (6)

The corresponding time is

1 ⎡⎛ θ 3 ⎞ ⎤
t1 = t1 ( q ) = ln ⎢⎜ ⎟(q − W ) + 1⎥
θ 3 ⎣⎜⎝ d ⎟⎠
(7)
⎦
IRo(t) is the distributor’s inventory level in OW at time t. The change in inventory level
of OW during an infinitesimal time can be formulated as

dI Ro (t )
= −θ 2 I Ro (t ) , 0 ≤ t ≤ t1 (8)
dt

dI Ro (t )
= −d − θ 2 I Ro (t ) , t1 ≤ t ≤ T1 (9)
dt
 A Joint Economic Production Lot Size Model for a Deteriorating Item 825

From equation (8) and (9), and with the various boundary conditions IRo(0)=W,
IRo(t1)=I1 and IRo(T1)=0, the solution of the above differential equations is

⎧ We − θ2t , 0 ≤ t ≤ t1
⎪
⎪
I Ro (t ) = ⎨ −θ 2 (t −t1 ) (10)
⎪− d + e (d + I 1θ 2 )
, t1 ≤ t ≤ T1
⎪ θ2
⎩
The inventory level of OW at t1 is

I 1 = We − θ2t1 (11)

From equation (10) and (11), the replenishment cycle is

1 ⎡ Wθ 2e 2 ⎤
−θ t1
1 ⎡ I1θ 2 ⎤
T1 = T1 ( q) = t1 + ln ⎢1 + = t + ln ⎢1 + ⎥
d ⎥⎦
1 (12)
θ2 ⎣ θ2 ⎢ d ⎥⎦
⎣
The distributor’s inventory cost during the planning horizon T, TCR, is the sum of the
ordering cost (ORc), the holding cost (HCR) and the deteriorating cost (DCR). One has
(i) 0 < t ≤ t min

⎛ d θ t d dt ⎞ ⎛ 1 − e − nαT1 ⎞ (W − d (T1 − t1 ) )
TC R = C R + C 0 + ⎜⎜ 2 e 3 1 − 2 − 1 ⎟⎟ ⋅ ⎜⎜ ⎟⎟ H Rr + H Ro n
⎝θ3 θ 3 θ 3 ⎠ ⎝ 1 − e −αT1 ⎠ θ2
+ (q − dT1 ) PR n

(ii) t min < t ≤ t max

TC R = C R +
C0 ⎛ d θ3 t1 d dt1 ⎞ ⎛ 1 − e − nαT1
+⎜ e − 2 − ⎟⋅⎜
⎞
⎟⎟ H Rr +
(W − d (T1 − t1 ) ) H n
nT1 ⎜⎝ θ 32 θ 3 θ 3 ⎟⎠ ⎜⎝ 1 − e −αT1 θ2 Ro
⎠
+ (q − dT1 ) PR n

(iii) t max <t

TCR = CR +
C0 ⎛ d θ3 t1 d dt1 ⎞
+⎜ e − 2 − ⎟⋅ H n +
(W − d (T1 − t1 ) ) H n
nT1 ⎜⎝ θ 32 θ 3 θ 3 ⎟⎠ 0 θ2 Ro
(13)
+ (q − dT1 ) PR n

where t1=t1(q) and T1=T1(q). (See Appendix A for the detailed derivations)

3.3 Joint Cost Structure of Single-Producer–Single-Distributor

The joint cost of the producer and the distributor, TC, is the sum of TCM and TCR. The
optimization problem of TC is a constrained nonlinear programming, stated as:
826 J.C.P. Yu

Minimize TC(q, n) = TCM + TCR

subject to 0 < q ⋅ θ1 < p , n ∈ N (13)

3.4 Simulated Annealing Procedures

To apply SA to a specific problem, we must define a cooling or annealing schedule for

the algorithm, a perturbation function and an energy function. Any annealing schedule
should include the initial temperature, the rate at which the temperature should be
decreased and good termination conditions for both the loops of the algorithms. In the
scenario under investigation, the problem is to minimize the joint cost TC(q, n). The
optimum values of q and n for which TC(q, n) is minimum are obtained using SA
process as described below.

Step 1. Since the number of delivery, n, is an integer value, we start by choosing an

integer value of n ≥ 1 .
Step 2. Representation and initialization: a real variable q is used to represent the
optimum lot size. A real constant q0 satisfying problem constraint is randomly
generated and taken as the initial guess of q.
Step 3. Perturbation function: a random number r between -0.25 and +0.25 is
generated using random number generator. q+r is taken as neighbour solution
of q if q+r satisfies the constraints of the problem.
Step 4. Energy function: our problem is to find the optimum inventory level q such
that joint cost TC(q, n) is minimum. Here -TC(q, n) is taken as the energy
function of the solution q.
Step 5. Cooling schedule: initial temperature T0 is taken according to different
parameter values of the energy function and reducing factor C for T
(temperature) is taken as 0.99.
Step 6. Repeat steps 2 ~ 5 for all possible n values until the minimum TC(q*, n*) is
found.

4 Numerical Example and Comment

＝
A numerical example is given to illustrate the theory in the study. The related input
parameters for the producer are: F=$20, CS=$25, PM=$40, p=24000, HM $5, and u=5.
＝
The related input parameters for the distributor are: d 15000, CR=$25, C0=$100, W ＝
＝ ＝ ＝
100, θ1 0.05,θ2 0.055, θ3 0.045, HRo =$6, HRr =$7 and PR=$50.
The optimal values of n, tr and total cost for the individual models and the
coordinated model are summarized in Table 1. The major conclusions and the special
conditions drawn from the numerical example are as follows:

(1) The optimal solution is: q*= 190 units, n*=15 deliveries; the admissible time
periods are: t1*=0.006 year, tp*=0.0079 year and T1*=0.0127 year, the
 A Joint Economic Production Lot Size Model for a Deteriorating Item 827

corresponding yearly cost for the producer is $402, the corresponding yearly cost
for the distributor is $711, and the minimum joint cost is $1113.
(2) Since TC is a very complicated function due to high-power expression of the
exponential function, a graphical representation showing the convexity of the TC
function is given in Fig. 5. From the set of parameters considered, one can clearly
see that TC is strictly convex.
(3) As in Table 1, the joint-cost mode is the lowest with the integrated policy. It is
clearly seen that if all the system players follow the integrated policy and agree on
the global optimal transportation frequency of n* deliveries, the integrated system
has a total cost saving of 36% or $629 from the producer’s perspectives. The
reason is that the producer prefers to deliver a small batch to reduce the holding
cost. But the total joint cost increases due to the increasing delivery frequency. The
integrated system has a total cost saving of 5.8% or $69 from the distributor’s
perspectives.
(4) Since equation (14) is non-linear equation, the closed form solution of q and n
cannot be obtained. However, the optimal conditions:

∂ 2 TC / ∂q 2 > 0, ∂ 2 TC / ∂n 2 > 0

and
2
∂2TC ∂2TC ⎛⎜ ∂2TC ⎞
⎟ >0
−
∂q 2 ∂n 2 ⎜⎜ ∂q ∂n ⎟⎟
⎝ ⎠

for a particular solution can be illustrated numerically. From the solution in Table 1,
∂ 2 TC / ∂q 2 = 0.0427, ∂ TC / ∂n = 4.678 and
2 2

2
∂ 2TC ∂ 2TC ⎛ ∂ 2TC ⎞
− ⎜⎜ ⎟ = 0.0749
⎟⎟
∂q 2
∂n
2
⎜ ∂q ∂n
⎝ ⎠
Hence, we have illustrated the convexity of equation (14).

Table 1. Total joint cost for different policies

The optimal number Per ordering Per excess Total joint cost
Policy
of delivery quantity quantity (TC)
Producer’s
N.A. 97 0 1742
perspectives
Distributor’s
23 170 70 1182
perspectives
Integrated
15* 190* 90 1113*
policy
Note: * is the global optimum that minimizes TC; N.A.= not applicable.
828 J.C.P. Yu

Fig. 5. Graphical representation of a convex TC (where n*=15, q*=190 and T*=0.1905)

5 Sensitivity Analysis
With the integrated policy, the optimal values of n, TCR, TCM, TC and q for a fixed set
of parameters Φ = {p, F, W, θ1, θ2, θ3, d, PM, HM, CS, CR, HRo, HRr, PR, C0, u}are denoted
by n*, TCR*, TCM*, TC* and q* respectively. Their changes are then considered when the
parameters in the set Φ vary. Sensitivity analysis where the parameters in the set Φ
， ， ，，
increases or decreases by { -30% -20% -10% 0 +10% +20% +30%}are ， ，
carried out. The results of the sensitivity analysis are shown in Table 2.

Table 2. The sensitivity analysis of PICC

Base % changed
Parameter
Column -30% -20% -10% +10% +20% +30%
p 24000 3.49 2.07 1.35 -0.36 -0.81 -1.17
F 20 -8.06 -5.36 -2.66 2.74 5.44 8.14
W 100 0.19 0.19 0.19 0.19 0.20 0.20
θ1 0.05 -2.43 -0.99 -0.18 0.57 0.69 1.06
θ2 0.055 0 0 0 0.90 0.90 0.90
θ3 0.045 0 0 0 0 0 0
d 15000 -7.93 -5.68 -2.25 3.33 7.66 11.08
PM 40 -0.36 -0.18 0 0 0.18 0.63
HM 5 -1.35 -0.81 -0.36 0.54 1.08 1.62
CS 25 -0.9 -0.9 0 0 0.9 0.9
CR 25 0 0 0 0.9 0.9 0.9
HRo 6 -1.8 -0.9 -0.9 0.9 1.8 2.7
HRr 7 -0.8 -0.54 -0.27 0.27 0.54 0.72
PR 50 -0.9 -0.9 0 0.9 0.9 1.8
C0 100 -14.4 -9 -4.5 5.4 9.9 14.4
u 5 0.297 0.206 0.205 0.203 0.201 0.200
Note: TC*is the global optimum of the integrated total cost TC.
PICC: Percentage of Integrated Cost Change = (TC- TC*)/TC*
 A Joint Economic Production Lot Size Model for a Deteriorating Item 829

The main conclusions from the sensitivity analysis are as follows:

(1) When the distributors’ demand rate increases, each player’s total cost TCM, TCR,
and the joint cost TC increase.
(2) The most sensitive parameter is the deterioration rate of the producer,θ1.
(3) When the production rate increases, PICC decreases and the frequency of delivery
decreases to counteract the delivery cost.
(4) The PICC is most sensitive to C0, the parameter of the basic administration fee in
RW. The increase is more than 14% when d increases by 30%.
(5) The PICC’s sensitivity related to the parameters in Φ can be ranked as:
～
C0, F, d: 8 % 14 %;
～
θ1, p, HM, HRo,PR: 1% 3 %;
≦
CS, CR, W, u, θ2, θ3, HRr, PM,: 1%.

6 Conclusions
This study develops an optimal joint-cost policy in a two-echelon producer-distributor
supply chain inventory system. With the integrated policy, the total joint cost is found
to be less than the independent approach by the individual players. This is because
global optimum will only be realized if the perspectives of all players are considered. In
the case of limited capacity, it is more profitable for the excess stock to be held in RW
whenever the storage capacity of OW is insufficient. However, over a long rental
period, RW storage cost might be less than that in OW. Thus, depending on the relative
cost, the rented warehouse policy can be used. The study also enables an enterprise with
a channel business model to coordinate the use of OW and RW, and develop an optimal
ordering policy through the coordination of the producer and the distributor. Again for
the first time, the two-echelon supply chain inventory problem has been solved by SA
algorithm which always ensures global optimum. This model can be extended to
include fixed time horizon, shortages- fully or partially backlogged, stock-dependent
inventory costs, etc. This problem can also be formulated in fuzzy, probabilistic and
mixed environments.

References
1. Benkherouf, L.: A deterministic order level inventory model for deteriorating items with
two storage facilities. International Journal of Production Economics 48, 167–175 (1997)
2. Bhunia, A.K., Maity, M.: A two warehouse inventory model for deteriorating items with linear
trend in demand and shortages. Journal of Operational Research Society 49, 287–292 (1998)
3. Ghare, P.M., Schrader, S.F.: A model for an exponentially decaying inventory. Journal of
Industrial Engineering 14, 238–243 (1963)
4. Goyal, S.: An integrated inventory model for single supplier-single customer problem.
International Journal of Production Research 15, 107–111 (1976)
5. Hartely, V.: Operations Research—A Managerial Emphasis. Good Year, California (1976)
6. Ishii, H., Nose, T.: Perishable inventory control with two types of customers and different
selling prices under the warehouse capacity constraint. International Journal of Production
Economics 44, 167–176 (1996)
830 J.C.P. Yu

7. Pakkala, T.P.M., Achary, K.K.: A two warehouse probabilistic order level inventory model
for deteriorating items. Journal of the Operational Research Society 42, 1117–1122 (1991)
8. Pakkala, T.P.M., Achary, K.K.: A deterministic inventory model for deteriorating items
with two warehouses and finite replenishment rate. European Journal of Operational
Research 57, 71–76 (1992)
9. Pakkala, T.P.M., Achary, K.: Discrete time inventory model for deteriorating items with two
warehouses. Opsearch 29, 90–103 (1992)
10. Rengarajan, S., Vartak, M.: A note on Dave’s inventory model for deteriorating items.
Journal of Operation Research Society 34(6), 543–546 (1983)
11. Sarma, K.V.S: A deterministic inventory model with two levels of storage and an optimum
release rule. Opsearch 20, 175–180 (1983)
12. Sarma, K.V.S.: A deterministic order level inventory model for deteriorating items with two
levels of storage. European Journal of the Operational Research 29, 70–73 (1987)
13. Sarma, K.V.S., Sastry, M.P.: Optimum inventory for systems with two levels of storage.
Industrial Engineering Journal 8, 12–19 (1988)
14. Wee, H.M.: Joint Pricing and Replenishment Policy for Deteriorating Inventory with
Declining Market. International Journal of Production Economics 40, 163–171 (1995)
15. Wee, H.M.: A Deterministic Lot-size Model for Deteriorating Items with Shortages and a
Declining Market. Computers & Operations Research 22, 345–356 (1995)
16. Yang, H.L.: Two-warehouse inventory models for deteriorating items with shortage under
inflation. European Journal of Operational Research 157, 344–356 (2004)
17. Yang, P.C., Wee, H.M.: A single-vendor and multiple-buyers production-inventory policy
for a deteriorating item. European Journal of Operational Research 43, 570–581 (2002)
18. Zhou, Y.W.: A multi-warehouse inventory model for items with time-varying demand and
shortages. Computers and Operations Research 30, 2115–2134 (2003)

Appendix A. The Cost Functions of Distributor

Since the planning horizon is divided into n equal-length cycle, each has a length of
T1 = T / n . The administration fee and the holding cost in RW during the planning
horizon T can be derived as
n −1 t1

HC RRe nt = ∑ ∫I Rr (t ) ⋅ hk (t ) dt
k =0 0

∫ θ [e ]
n −1 t1
d θ
=∑ 3 ( t1 − t )
− 1 ⋅ H Rr e −αkT1 dt
k =0 0 3

[e ] [e ]
t1 t1
d d
=∫ θ 3 ( t1 − t )
− 1 ⋅ H Rr dt + ∫ θ 3 ( t1 −t )
− 1 ⋅ H Rr e −αT1 dt
0
θ3 0
θ3
(A1)
[e ] [e ]
t1 t1
d d
+∫ θ 3 ( t1 − t )
− 1 ⋅ H Rr e − 2αT1 dt + …… + ∫ θ 3 ( t1 −t )
− 1 ⋅ H Rr e −( n −1)αT1 dt
0
θ3 0
θ3
⎛ H d θ t H d H dt ⎞ n −1
= ⎜⎜ Rr2 e 3 1 − Rr2 − Rr 1 ⎟⎟ ⋅ ∑ e −αkT1
⎝ θ3 θ3 θ 3 ⎠ k =0
⎛ d θ t d dt ⎞ ⎛ 1 − e − nαT1 ⎞
= H Rr ⎜⎜ 2 e 3 1 − 2 − 1 ⎟⎟ ⋅ ⎜⎜ ⎟⎟
⎝ θ3 θ 3 θ 3 ⎠ ⎝ 1 − e −αT1 ⎠
 A Joint Economic Production Lot Size Model for a Deteriorating Item 831

The holding cost in OW during the planning horizon T is

⎛ ⎞
⎟ nH Ro (W − d (T1 − t1 ) )
t1 T1
⎜
HC ROwn
⎜ ∫ ⎟∫
= n⎜ H Ro I Ro dt + H Ro I Ro dt ⎟ =
θ2
(A2)
⎝ 0 t1 ⎠
The corresponding deteriorating quantity in RW during t1 is
Re nt
q Rd = I Rr (0) − dt1 = q − W − dt1 (A3)

The corresponding deteriorating quantity in OW during T1 is

q Own
Rd
= q Own
Rd
1
+ q Own
Rd
2
= I Ro (0) − I Ro (t1 ) + I Ro (t1 ) − d (T1 − t1 ) = W − d (T1 − t1 ) (A4)

Therefore, from equation (A3) and (A4) the deteriorating cost during the planning
horizon T can be expressed as
DC R = DC RRe nt + DC ROwn = (q − W − dt1 + W − d (T1 − t1 ) )PR n = (q − dT1 ) PR n (A5)
The distributor’s inventory cost during the cycle is the sum of the ordering cost (ORc),
the holding cost (HCR) and the deteriorating cost (DCR). One has
TC R 2 = ORc + HC RRe nt + HC ROwn + DC RRe nt + DC ROwn

= CR +
C0 ⎛ d θ3 t1 d dt1 ⎞ ⎛ 1 − e −nαT1
+⎜ e − 2 − ⎟⋅⎜
⎞
⎟⎟ H Rr +
(W − d (T1 − t1 ) ) H n
(A6)
nT1 ⎜⎝ θ 32 θ 3 θ 3 ⎟⎠ ⎜⎝ 1 − e −αT1 θ2 Ro
⎠
+ (q − dT1 ) PR n