International Journal of Production Research

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Inventory management of perishable products: a

time decay linked logistic approach

Sadia Samar Ali , J. Madaan , Felix T.S. Chan & S. Kannan

To cite this article: Sadia Samar Ali , J. Madaan , Felix T.S. Chan & S. Kannan (2013) Inventory
management of perishable products: a time decay linked logistic approach, International
Journal of Production Research, 51:13, 3864-3879, DOI: 10.1080/00207543.2012.752587

To link to this article: https://doi.org/10.1080/00207543.2012.752587

Published online: 21 Mar 2013.

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International Journal of Production Research, 2013
Vol. 51, No. 13, 3864–3879, http://dx.doi.org/10.1080/00207543.2012.752587

Inventory management of perishable products: a time decay linked logistic approach

Sadia Samar Alia, J. Madaanb1, Felix T.S. Chanc* and S. Kannand
a
Fortune Institute of International Business, India; bDepartment of Mechanical and Industrial Engineering, IIT, Roorkee, India;
c
Department of Industrial and Systems Engineering, The Hong Kong Polytechnic University, Hong Kong; dManagement Department,
BITS, Pilani, India
(Received 10 February 2012; final version received 19 November 2012)

This paper proposes a logistic-based approach to a class of inventory problems with shortages and time decay functions.
Time decay and shortages are a common phenomena in products with short life cycles, and financial volatility necessi-
tates more accurate characterisation of inventory costs based on time-adjusted value. In this paper an extended approach
of Wagner–Whitin (WW) is used to determine lot sizes, replenishment cycle, and schedules. A sensitivity analysis of the
proposed optimisation procedure has been conducted to justify its advantages.
Keywords: inventory management; lot sizes; perishable products; deterioration; time value.

1. Introduction
Manufacturing enterprises are constantly facing challenges related to the continuous design, development, and manufac-
ture of new products. New products thus appear and disappear at a much faster pace. Traditional inventory planning
techniques for products with long life cycles may not be suitable for products with short life cycles. This paper presents
a detailed summary of contributions made on a class of inventory models and proposes a logistic approach for all such
inventory problems. The proposed logistic approach is demonstrated with an example model. Numerical illustrations
have also been presented. This paper arises from the fact that the following three types of inventory problems can be
grouped together, namely, (1) products with short life cycles, (2) products with ramp-style demand, and (3) green prod-
ucts. Effective management of a supply chain calls for getting the right product at the right time to the right place and
in the right condition. This has never been a simple task and, in many sectors, recent developments have made it more
complicated still. Increasing numbers of products are becoming subject to obsolescence, losing value over time as new
items are introduced while older versions are phased out. Even products previously thought of as durable, such as furni-
ture, high-technology goods and biotechnology products (drugs, vitamins, cosmetics) are falling prey to perishability.
Managing such perishable supply chains is not for the faint of heart – matching supply with demand can be very chal-
lenging – and their mismatch may be extremely costly. It is not so simple to manage the inventory of perishable items.
Research contributions on time-bound demand patterns have been made under different headings. Some of the
important contributions under the three prominent headings are outlined in the following paragraphs. A logistic approach
can be used in all these applications. This study determines an optimal replenishment schedule considering deterioration
and shortage with time-adjusted value using a logistic approach. This work deals with the three kinds of inventory prob-
lems. Firstly, products being launched have very short life cycles, they come up with a high demand but soon this
demand diminishes. Secondly, the case of ramp-type style demand is normal initially, i.e. products come up with high
demand and then stabilise. Finally, due to various environmental and government pressures, enterprises have begun to
focus on green and sustainable products and these are explained ahead.

2. Current research in products with fast deterioration/short life cycles

During the replenishment period, inventory depletion occurs because of the combination of market demand and
deterioration. Deterioration occurs because of various effects such as decay, spoilage, damage, obsolescence,
and decreasing usefulness resulting in the requirement of optimal inventory policy considering this value erosion (Chan

*Corresponding author. Email: mffchan@inet.polyu.edu.hk

Ó 2013 Taylor & Francis
 International Journal of Production Research 3865

and Chan 2010). A detailed discussion on inventory systems of market demand for the item being considered to be con-
stant is given by Heng, Labban, and Linn (1991) and Lin and Chen (2003). Initially Economic Order Quantity (EOQ)
models for an inventory with an exponential decay of items (i.e. a constant rate of deterioration over time), or a variable
proportion of the on-hand inventory deteriorating over time, have been developed, later inventory models with deteriora-
tion under time-dependent demand rates are studied (Chen and Chen 2007; Jaber et al. 2009). Further, Li, Hongjie, and
Mawhinney (2010) explain that products with short life cycles are important sources of enterprises’ profits. Many
researchers have studied deteriorating item inventory models.
Generally, deterioration is defined as decay, change, or spoilage that prevents an item from being used for its origi-
nal purpose. There are items in which appreciable deterioration can take place during the normal storage period of the
units and consequently this loss must be taken into account when analysing the model. A large number of researchers
have developed models in the area of deteriorating inventories. Ghare and Schrader (1963) established the classical no-
shortage inventory model with exponential decay. In fact, Ghare and Schrader were two of the earliest researchers to
consider a continuously decaying inventory for constant demand. In many real-life situations, items such as medicine,
volatile liquids, and blood deteriorate continuously (Kawakatsu 2011; Chang, Ouyanga and Dye 2006). Shah and Jai-
swal (1977) presented an order level inventory model for deteriorating items with a constant rate of deterioration.
Aggarwal (1978) developed an order level inventory model by correcting and modifying the error in Shah and Jaiswal’s
analysis in calculating the average inventory holding cost. An inventory model was formulated by Jaggi and Aggarwal
(1996) for obtaining the optimal order quantity of deteriorating items with salvage value associated to the units deterio-
rating during the cycle and constant demand. Considering time dependent demand, Benkherouf (1997) developed deter-
ministic order level inventory models for deteriorating items. Goyal and Gunasekaran (1995) developed an integrated
production inventory marketing model for determining the economic production quantity (EPQ) and EOQ for raw mate-
rials in a multi-stage production system. They also considered the effect of different marketing policies such as the price
per unit product and the advertisement frequency on the demand of a perishable item. All these models are based on
the assumption that the item deteriorates at a constant rate and the replenishment rate is infinite.
Another class of models was developed considering the rate of replenishment to be finite and a known constant.
Chowdhury and Chaudhuri (1983) introduced an order level inventory model assuming the demand and the rate of dete-
rioration to be constant. Considering time dependent deterioration, Mandal and Phaujdar (1989) developed inventory
models taking a finite and constant rate of replenishment. Goswami and Chaudhuri (1992) proposed deterministic mod-
els by assuming that deterioration is time-proportional and the finite replenishment rate is directly proportional to the
time-dependent demand rate. In his models, he considered both deterministic and stochastic demand for single and mul-
tiple items. Also, he reviewed application of his models to blood bank management. David and Mehrez (1995) consid-
ered the models where inventory reaches zero due to exogenous failure processes. Cobbaert and Oudheusden (1996)
developed inventory models for fast moving items subject to sudden death obsolescence. In their models, different cases
of obsolescence risk are studied allowing shortages and without shortages.
Covert and Philip (1974) used a variable deterioration rate of two-parameter Weibull distribution to formulate the
model with assumptions of a constant demand rate and no shortages. However, all the above models are limited to con-
stant demand. Few research studies highlight the problem of the strength of a manufactured item against stress when the
component follows the Weibull failure law. This issue can further be studied by different cases of stress and strength
with varying parameters which have been considered for the Weibull–Weibull stress strength model of product reliability
(Ali and Kannan 2011).
However, most of the above contributions mainly consider the following types of time-varying demand models: line-
arly or exponentially increasing/decreasing demand rate. In practice, the demand for items cannot continue to increase
over time. Some models have considered a one-cycle model with demand being a function of time and price while oth-
ers have focused on deterioration rates and partial backlogging rates being general functions of time.
Bhunia and Maiti (1999) extended the inventory model for time-dependent deteriorating items with trapezoidal-type
demand rate and partial backlogging by assuming demand rate with a continuous trapezoidal function of time, that is,
the demand rate for such items increases with time up to a certain time, then stabilises and becomes constant, and
finally the demand rate decreases nearly to zero and the goods retreat from the market in their life cycle. Youjun, Yiqian
and Liang (2010) studied inventory problems for perishable items and products with short life cycles under conditions
where the supplier offers discount prices to the retailer and the retailer adopts advanced sales policies in which demand
is interrelated with price, and time and deteriorating rates are constant. Inventory models for price optimisation have
been developed to maximise total profit. Most recently, an inventory model for time-dependent deteriorating items with
trapezoidal-type demand rates and partial backlogging was considered in Cheng, Zhang, and Wang (2011). The demand
rate is defined as a continuous trapezoidal function of time, and the backlogging rate is a non-increasing exponential
function of the waiting time up to the next replenishment.
3866 S.S. Ali et al.

The goal of inventory management is to determine when and how to order so that inventory cost can be minimised.
The cost function associated with the inventory systems in the decision model includes replenishment cost, inventory
carrying cost, and the shortage cost. Misra (1979) opined that a realistic model should consider a separate inflation rate
for each of its cost components into two classes: class one consists of costs which increase at the inflation rate that pre-
vails within the company (internal inflation rate), while class two consists of costs that increase at the inflation rate of
the general economy or of the supplier company. The value of the product may decrease significantly due to the influ-
ence of the time value of money. Both the time value of money and inflation should be incorporated in any decision
model. A finite replenishment model with shortages allowed, effects of inflation, and time value on order quantity is
developed (Sarker and Pan 1994).
Buzacott (1975) developed an EOQ model of uniform inflation for all the costs and minimised the average annual
cost. The objective function should be the maximisation of profit instead of the minimisation of cost. If the unit price is
changed only at the beginning of each cycle, the pricing continuously increases at the inflation rate.
For a finite planning horizon, many contributions dealing with four different inventory shortage models can be
found. These four models are depicted graphically and later extended (Yang 2005). There exist numerous ways by
which quantities are taken out of inventory to satisfy demand. These different ways by which demand occurs during a
period is referred to as demand patterns. Usually, the demand pattern is uniform, that is the demand rate is the same
during all the period. There are other ways by which the units may be withdrawn throughout the period. A general class
of them, called power demand pattern, was presented. There are several papers where the demand follows a power pat-
tern. An inventory model for items with deterioration, shortages, and power demand patterns was presented (Lee and
Wu 2002). Recently, Wanga, Lia, and O’Brien (2009) studied an inventory model where shortages are allowed, consid-
ering that the demand follows a power pattern. During the shortage period, a fraction of the demand is backlogged and
the remainder is considered lost sales. The objective consists of determining the lot size and the order level such that
the total inventory cost per unit time is minimised. A general procedure is presented to obtain the optimal inventory pol-
icy and the minimum associated cost.
Time-varying demand patterns are commonly used in different phases of product life cycles in the market. For
example, the demand for inventory items increases over time in the growth phase and decreases in the decline phase.
But the model initially developed by Donaldson (1977) is an inventory model with a linear trend in demand. Later,
many research works (see Hwang (1997)) have been devoted to incorporating a time-varying demand rate into their
models for deteriorating items with or without shortages under a variety of circumstances. Since there are many invento-
ried goods that either deteriorate by direct spoilage or by decay, or that become obsolete in the course of time, the anal-
ysis of deteriorating inventory has attracted the attention of many researchers (Hariga 1996; Papachristos and Skouri
2000; Teng et al. 2002). Inventory models have been developed assuming that the time to deterioration follows a Wei-
bull distribution by Chakrabarty, Giri, and Chaudhuri (1998), among others. Yang (2005) has developed the model to
determine an optimal pricing and an ordering policy for deteriorating items with quantity discount proposed by vendor.

2.1 Research in products with fashion ramp-style demand

In the case of ramp-type demand rate, the demand increases linearly at the beginning and then the market grows into a
stable stage such that the demand becomes a constant until the end of the inventory cycle. Basically the ramp-type
demand rate is seen when some new brand of consumer goods comes to the market, such as newly launched fashion
goods and cosmetics, garments, automobiles, etc., for which the demand initially increases with time and after some
time becomes constant. It is observed that the demand rate of new brands of consumer goods that come to the market
increases at the beginning of the season up to a certain moment and then remains constant for the rest of the time. For
example, the demand rate increases during the growth stage and then the market grows into a stable stage such that the
demand becomes a constant until the end of the inventory cycle.
Therefore, a ramp-type demand rate function has two different time segments. In its first segment, demand is an
increasing function of time, while demand remains constant in the second time segment. It is obvious that any ramp-
type demand function has at least one break point between the two time segments at which it is not differentiable. This
non-differentiable break point makes the analysis of the problem more complicated, which in turn has urged researchers
to study inventory models with ramp-type demand patterns.
In addition, Whitin (1957) considered an inventory model for fashion goods deteriorating at the end of a prescribed
storage period. Later it was extended by Wagner and Whitin (1958) and during this extension the deterministic lot-size
model has given rise to a vast body of research. For an important special case, where demand is stochastic and time
varying, an algorithm for determining an optimal solution is proposed by Vargas (2009). Wu and Ouyang (2000) studied
 International Journal of Production Research 3867

the inventory model by including two different replenishment policies, (1) models with no shortage and (2) models with
shortage. Deng, Lin, and Peter (2007) pointed out some questionable results of and Wu and Ouyang (2000), and then
resolved a similar problem by offering a rigorous and efficient method to derive the optimal solution by including the
two different replenishment policies.
Wu (2001) presented an EOQ inventory model depleted not only by demand but also by Weibull distribution deteri-
oration, in which the demand rate is assumed with a ramp-type function of time. In this model, shortages and partial
backlogging are allowed and the backlogging rate is variable and is dependent on the waiting time for the next replen-
ishment. The method is illustrated by three numerical examples, and a sensitivity analysis of the optimal solution with
respect to the parameters of the system has also been carried out. Giri, Jalan, and Chaudhuri (2003) extended the ramp-
type demand inventory model with a more generalised Weibull deterioration distribution. A single-item single-period
EOQ model for deteriorating items with a ramp-type demand and Weibull deterioration distribution is considered in this
study. The shortages in inventory are allowed and backlogged completely. The model is developed over an infinite plan-
ning horizon and the optimal replenishment policy is derived by minimising the total inventory cost per unit time.
Here is an interesting example of the fashion retail giant Zara. In general, in each season, fast-fashion retailers offer
a large number of products produced in small series, continuously changing the assortment of products displayed in
their stores. Ghemawat and Nueno (2003) report that retail giant Zara offers on average 11,000 references in a given
season, four to five times more than its competitors, in order to increase its appeal to customers. Fraiman et al. (2002)
state that Zara customers in Spain on average make 17 store visits per year in search of variety and discounted prices.
Results interestingly show that only 15–20% of Zara’s sales are typically generated at marked-down prices, compared
with 30–40% for most of its European peers, with an average percentage of discounts estimated at roughly half of the
30% average for competing European apparel retailers. The fast-fashion retail paradigm described here gives rise to
many novel and interesting operational challenges, as highlighted in the case studies on Zara (Fraiman et al. 2002).
Panda, Saha, and Basu (2007) built an inventory model for deteriorating items with a three-parameter Weibull distrib-
uted deterioration rate, a generalised exponential ramp-type demand rate, and complete backlogging.
Donaldson (1977) was the first to analytically solve the EOQ model, where demand was assumed to be a linearly
increasing function of time. In reality, there are certain inventoried goods whose demand cannot continue to be indefi-
nitely large with time. For example, consider newly launched fashion products in the market. The demand for these
items increases linearly/exponentially for an initial period only if customers are satisfied with quality and price. After-
wards, demand becomes steady rather than increasing linearly/exponentially, which can be termed as ramp-type demand
(see Ferdows, Lewis, and Jose 2005), aimed to review the current state of operations and recent trends across the fash-
ion supply chain in the US. The fashion industry has short product life cycles, tremendous product variety, volatile and
unpredictable demand, and long and inflexible supply processes (Sen 2008). These characteristics, lead to a complex
supply chain, and wide availability of data make the industry a suitable avenue for efficient production/inventory man-
agement practices. Further, this sector has been in transition over the last 20 years, during which time there has been sig-
nificant consolidation in retail, the majority of apparel manufacturing operations have moved overseas, and, more
recently, there has been an increasing use of electronic commerce in retail and wholesale trade. Caro and Gallien (2010)
address the problem of distributing over time a limited amount of inventory across all the stores in a fast-fashion retail
network. Most recently, Skouri et al. (2011) have dealt with ramp-style demand inventories.

2.2 Research in green/sustainable products

Due to increasing competitive pressure, shortened life cycles of products, and environmental consciousness, collabora-
tion and the smart use of resources in inventory management processes are becoming more important. Activities related
to the above issues consist of the sharing of information, resources and relevant techniques, and the utilisation of reverse
manufacturing practices. Green inventory management and system collaboration activities have also become major
issues faced by organisations. This is particularly so with organisations that have strong internal and external linkages.
Of late, because of concerns such as global warming and other environmental issues, green products and green produc-
tion/inventory management processes are starting to receive attention. Green product design has also received much
attention recently for product design, and it significantly influences the cost of disassembly, component inspection and
repair, remanufacturing, and recycling. These green product designs and remanufacturing efforts have to be incorporated
in the development of integrated production/inventory models. In the last decade, green product design and systems
collaboration have become major issues faced by organisations (for more details please refer to Madaan, Kumar, and
Chan (2012)). Such policies also impose greater responsibility on the producer and the consumer for the safe disposition
of their products. Governments all over the world have begun implementing regulations that impose various
3868 S.S. Ali et al.

requirements on manufacturers and other parties with respect to their end-of-life (EOL) products (Fishbein 2000). Owing
to such regulations and the Waste Electrical and Electronic Equipment (WEEE) Directive, manufacturers seeking to
reduce product recovery and remanufacturing costs have begun modifying product designs and incorporating EOL prod-
uct reuse concepts into product and component design. Researchers have investigated the impact of the green product
design, new technology evolution, and remanufacturing on production–inventory policies using a logistic models (Chung
and Wee 2008).
Due to the above-stated environmental responsibilities, enterprises are trying to reuse, remanufacture, and recycle
used products to reduce their negative impact on the environment, especially the manufacturers of the electrical con-
sumer products. Therefore, the reverse manufacturing problem is a critical problem at all levels of the electrical and
computer industry. Reverse manufacturing is strongly related to all stages of product development. Chung and Wee
(2008) tried to simplify reverse manufacturing practices using logistic models. Nations are developing waste-handling
prohibitions, regulations, and incentive programmes to encourage alternative disposition of electronic waste (Callahan,
Dunne, and Stanaback 1997). All these developments explain why, in recent years, the rate of electronic reuse and recy-
cling has steadily increased, and why in America the volume of products recovered is expected to increase at an annual
rate of 18%. We know that life cycle design seeks to maximise the life cycle value of a product at the early stages of
design, while minimising cost and environmental impact. Ishii, Eubanks, and Di Marco (1994) introduced the concept
of the life cycle value and illustrated a prototype computer tool for design for product retirement (DFPR) using the com-
puter industry as an example. The paper focuses on product retirement and advanced production/inventory planning for
material recycling. DFPR was applied to retirement strategies for product disassembly and the reprocessing of subassem-
blies and components. For the issue of designing for remanufacturing or recycling, Madaan, Kumar, and Chan (2012)
outlined a concept for the integration of product repair and product take-back, explaining the necessity and importance
of arriving at an optimal lot size for procurement/recovery.
In determining optimal lot sizes for production/procurement and recovery, Schrady (1967) was the first author to
study the problem. He analysed the problem in the traditional EOQ setting, namely, deterministic and continuous
demand and return. He assumed that the recovery rate was larger than the demand rate, and derived a lot-sizing formula.
Koh et al. (2002) assumed an infinite production rate and finite recovery rate, and Kiesmuller (2003) assumed that
demands are satisfied from serviceable inventory, which can be replenished by remanufactured returned items, which are
as good as new, or by new produced items. White, Ratchev, and Moualek (2003) presented a generalised overview of
product recovery describing the recovery of computers as a step-by-step process, and framed an environmental research
agenda for the recovery management of the computer industry. Bonney, Ratchev, and Moualek (2003) examined some
of the changes that are occurring in manufacturing companies and in the market. Changes include the product design
process, reduction in product design time, new technology, new materials, and production methods, the availability of
better quality data, and organisational changes including changes in the techniques and tools used.
This remainder of this paper is organised as follows. In the next section, the logistic model for products with short
life cycles is discussed. In Section 4, the mathematical model and proposed approach are presented to solve the logistic
model for deterioration and shortage with time value for the logistic model. Sensitivity analysis with case problem is
explained in Section 5 followed by the conclusion.

3. Proposed logistic approach

Reverse logistics stands for all operations related to the reuse of products and materials. It is the process of planning,
implementing, and controlling the efficient, cost effective flow of raw materials, in-process inventory, finished goods
and related information from the point of consumption to the point of origin for the purpose of recapturing value or
proper disposal. Which can further be said more precisely, reverse logistics is the process of moving goods from their
typical final destination for the purpose of capturing value or for proper disposal.
To model inventory complexity of reverse logistics initially one can refer to an order policy for an inventory item
having a linear demand. Shortages in inventory systems are a normal phenomenon. The planning horizon at H periods
into m equal order cycles is found in this model. An inventory followed shortage (IFS) replenishment policy was pro-
posed by Deb and Chaudhuri (1987). They observe that no shortages are reasonable at the lost replenishment, the first
replenishment taking place at time zero. Each of the replenishments is made at time ti in the interval (si, si+1). Therefore
shortages will occur at (n-1) replenishments if n replenishments are made during the time period 0 to H. In this model,
shortage is taken as the initial state of each replenishment. The accumulated shortages during the period ti to si+1 (ti < si+1)
are used to meet the reminder. It was shown that for identical parameters the replenishment policy has a lower
 International Journal of Production Research 3869

inventory cost than an IFS replenishment policy. Therefore, the authors have chosen to use an IFS policy in the present
paper.
The number of buyers and the demand interact due to imitation effects (see Figure 1). This enables dynamics of
demand to be modelled with logistic models rather than normal distribution. For modelling with shorter life cycle pro-
ducts, the researcher can formulate and solve it as one inventory replenishment problem based on the logistics demand
model. According to this there is an even distribution of buyers in the market across the product life cycle, which are
classified into five categories based on their propensity to adopt a specific change: innovators, early adopters, early
majorities, late majorities, and laggards. Further, among all buyers, market innovators represent nearly 2.5% and early
adopters 13.5% of all buyers due to imitation effect. A total of 34% of all buyers constitute early majority and late
majority as well. Those buyers who are lagging behind represent 16% and they too slowly become adopters. Demand is
depicted by the shape of the distribution curve (Baxter 1995) shown in Figure 1. A detailed study on logistic distribu-
tions is presented in Gupta and Kundu (2010). They discussed the different properties of the two generalisations of
logistic distributions, which can be used to model the data exhibiting a unimodal density having some skewness present,
and have proposed different estimators and performed one data analysis for illustrative purposes.
For this kind of dynamic demand several mathematical models have been proposed such as Bass’ model of diffusion
of durables, Little’s BRANDAID model (Little 1975), and McGuire and Staelin’s model of channel (McGuire and Sta-
elin 1983). Communication of an innovation through certain channels is done through the process of diffusion. An inno-
vation is an idea, practice, or object perceived as new by an individual or other unit of adoption. The formidable tools
of diffusion in today’s world are information technologies such as the Internet and cell phones which combine aspects
of mass media and interpersonal channels (Morris and Ogan 1996; Madaan, Kumar, and Chan 2012). Life cycle curves
can be divided into two halves of growth and decline and modelled by exponential distribution which has a memoryless
characteristic of exponential distribution. The demand variation between periods has a tight relationship and does not fit
well with the dynamic market. There are thousands of applications in various areas (Wang et al. 2008). To model the
demand over the short life cycle of fashion-related products and others, a similar class of inventory models has been
adopted in this paper.
Meyer, Yung, and Ausubel (1999) first suggested that the demand for products with short life cycles may be mod-
elled by a logistic model. In a widely used exponential growth model, the growth of population P (t) is proportional to
the population. The equation for this can be written as

PðtÞ ¼ eatþb ð1Þ

Where, α and β are respectively a constant growth rate and a horizontal shifting location parameter. The population P(t)
can be considered as a particular set of people, for example, people who are ill during an epidemic, a political group, or
buyers of certain products and services. A shortcoming of this model is that, as t increases, the population also
increases.
The logistic curve begins with α and P(t) of the exponential model having a negative feedback function
½1  PðtÞ=z, that slows the growth when an upper limit z is reached.

Figure 1. Imitation effects among buyers

3870 S.S. Ali et al.

Figure 2. Example of the logistic curve

dPðtÞ
¼ aPðtÞ½1  PðtÞ=z ð2Þ
dt

Equation (2) closely approaches exponential growth for values of P(t) < < z. The feedback function causes the rate of
growth to reduce to zero as the population P(t) reaches the limit z, producing an S-shaped curve, when population P(t)
approaches z. A classical logistic growth curve can be clearly illustrated by Figure 2.
Equation (3) can be rewritten as
z
PðtÞ ¼ ; a[0; b\0 ð3Þ
1 þ eatb

Where, z gives the limit the logistic function asymptotically approaches, given that constant z > 0 and that the value of
(-αt-β) decreases as t becomes larger. The slope of a logistic curve in the form P(t) =z/(1+e-αt-β) can be determined by
taking the first derivative of the curve function P(t).
The growth of particular industries such as mobile handset and TV industries, the growth of populations of living
organisms, the mastery by students of particular modules of knowledge, technology adoption, and so on, all of which
have a very rapid initial rate of growth followed by a decline in the rate of growth and an eventual asymptotic approach
to its limit can be usefully approximated by logistic curves (Ostrosky and Koch 1979).
Similarly, the growth of demand of high-tech and seasonal fashion products with short life cycles is modelled as the
population growth. With the maximal accumulated demand at time t, denoted as D(t), the rate at which the demand
grows can be formulated as a differential equation, and in time (t) it can be stated and represented as Equation (4)

dDðtÞ=dt ¼ aDðtÞð1  DðtÞ=DÞ; Dð0Þ ¼ D0 ð4Þ

Where, α is a constant growth rate, D is the maximal accumulated demand, and D0 is the initial demand and the values

of α and D changes with the types of products and geographical areas. If there is no extra promotion employed or tech-
nological breakthrough in the newly introduced product, the values of α, β and D  for the demand model can be esti-
mated based on the historical data of similar products.
Further, substituting Equation (1) in the derivative of Equation (4) will result in a logistic growth function as stated
below in Equation (5).


D
DðtÞ ¼ ð5Þ
1 þ eatb
 International Journal of Production Research 3871

Figure 3. Logistic model for fashion-related products

Thus the famous S-shaped curve is obtained (Figure 3). Initially the change on the accumulated demand increases,
the inflection point is reached, and, as it reaches and it approaches the maximal demand, it begins to decrease. The
logistic curve is shifted by α/β in time but β being the location parameter has no effect on its shape as depicted in the
two curves shown in Figure 3. The simple derivation shows that t=-β/α, β<0, provides the inflection point of the logistic
growth function D (t).
It is easier to visualise the accumulated demand with the first derivative of the logistic bell-shaped curve similar but
not identical to the normal distribution curve as shown in Figure 4. The demand rate at different times is represented by
bell-shaped curves, the demand rate at time t, denoted as d (t), gives the first derivative of D (t).

 atb1
aDe
dðtÞ ¼ 2 ð6Þ
ð1 þ eatb1 Þ

The complete logistic demand model therefore contains the introduction, growth, the maturity, and the decline of the
demand of the product. The maturity of the demand begins at s. Moreover, the short or long life cycle of high-tech sea-
sonal fashion, and similar products are represented in this model is its unique characteristics.

4. Extension of logistic model considering deterioration and shortage with time value
The logistic model was used to describe the American music market (Meyer, Yung, and Ausubel 1999). A study of unit
sales of US music recording media shows that the shift in market dominance from records to cassettes and then to CDs
is an orderly substitution. An analysis based on history predicts further shift to the new technology i.e. to digital
versatile discs DVDs, on market shares. To model this shift rather than using a regression analysis, the parameters for a
logistic model can be specified. Deterioration and shortages have been taken into account to construct the logistic model
having time-adjusted value consideration. An approach is proposed to extend the Wagner–Whitin approach (Wagner and
Whitin 1958).

Figure 4. The first derivative of the logistic curve

3872 S.S. Ali et al.

4.1 Assumptions and notations

The following assumptions are made as the basis of the study of the mathematical model.

– The inventory is continuously reviewed. The continuous review system permits real-time updates of inventory
counts, which can make it easier to know when to reorder items to replenish inventory.
– The system operates for a prescribed time period G.
– The accumulated demand D(t) and demand rate, d(t), is assumed to follow the logistic demand which is a
continuous function at time t.
– The demand model is a deterministic one with the lead time assumed to be zero.
– When goods are in stock, deterioration is likely to happen. It is dependent on the on-hand inventory and the elapsed
time in the system. It also includes the amount of deteriorated units in a given time interval. During planning
horizon G no provision is made for repair or replacement.
– The unique inflation rate, represents the discount rate and can be summarised as internal and the external inflation rates.
It is assumed that r-i>0. A practical assumption is that the interest rate is higher than the internal and external rate.
– The proposed model is useful for the system with or without shortages under the following conditions

• Both initial and final inventories are zero.

• Shortages are allowed and fully back ordered.
• The replenishment quantity is replenished instantaneously.
• When back orders are not allowed, the shortage cost can be set at a very high value, which will prevent the
occurrence of the shortage.

The distributor/retailer has to provide certain incentives to retain demand. In this way, shortage cost is contributed as
an incentive.

– The continuous variables are made of inventory level, replenishment quantity, shortage level, logistic demand
model, and net discount rate. The remaining variables are treated as discrete variables.
– The fixed purchasing/setup cost, purchasing/production cost, holding cost, shortage cost, and deteriorating cost
make total cost function.
– The deteriorating cost contains purchasing cost/production cost and disposal cost.

aDe atb
The following are the notations used throughout this paper, which are defined below, dðtÞ ¼ ð1þe atb Þ2
; denotes the

demand rate in the logistic model, where t is time, D is the maximum demand, α is the fixed growth rate, β is the
location parameters;
R = net discount rate of inflation PW ðpt Þ ¼ pt eRt , where pt is the value of p at time t and r-i>0;
F0 = fixed purchasing/setup cost for each replenishment;p0 = purchasing/production cost for each unit of the prod-
uct;
G0 = unit holding cost, i.e. cost per unit and per time period;
S0 = unit shortage cost, i.e. cost per unit and per time period;
n = time at the replenishing point;
s = starting time of the replenishment cycle at which shortage is about to occur;
e = ending time of the replenishment cycle at which inventory level reaches zero;
I(t) = inventory level at any time t;
S(t) = shortage level at any time t;
Q(p) = replenishment quantity at various replenishment points p;
D0 = unit deteriorating cost and D0 > P0;
M = deterioration rate.

4.2 Mathematical model

In the proposed system, there is no inventory held at the beginning or at the end of each replenishment cycle [s, f] along
the planning horizon. The cycle starts with accumulating shortage from time s until time n at which replenishment is
scheduled. The lot size received at time p equals the sum of the demand backordered during period [s, n] and the
demand requirement in the period [n, f].
 International Journal of Production Research 3873

First, we consider the shortage level, S(t), at time t, s  t  n. It is utterly depleted by the effect of the logistic model
during the period where the inventory level is negative. The variable state of S(t) with respect to t is determined by the
following first-order differential equation:
(
 atb
aDe
d
SðtÞ ¼ ð1þe ; s  t  n;
dt atb Þ2
ð7Þ
SðsÞ ¼ 0:

Solving the differential equation satisfying Equation (8) results in a function,

Z  aub
t
aDe
SðtÞ ¼ 2 du; s  t  n; ð8Þ
s ð1 þ eaub Þ

Similarly, we consider the inventory level, I(t), at time t, n  t  f. In addition to the effect of the logistic model, it
also depleted by the effect of deterioration. It is represented by the following differential equation,
(
aDe  atb
d
¼ ð1þe
IðtÞ  hIðtÞ; n  t  f
dt atb Þ2
ð9Þ
Iðf Þ ¼ 0:

Solving the differential equation satisfying Equation (10) results in a function

Z  aub
f
aDe
IðtÞ ¼ ehðutÞ du; n  t  f : ð10Þ
t ð1 þ eaub Þ2

At the replenishment point n, the replenishment quantity is computed as

QðnÞ ¼ SðnÞ þ IðnÞ ð11Þ

R f aDe
 atb
In the interval between n and f, the actual demand quantity is n ð1þe dt; but the actual replenishment quantity
R f ðtpÞ aDe
 atb
atb Þ2

n e ðð1þeatb Þ2 Þdt is required to offset consumer demand and deterioration.

The total deterioration during the period of inventory level is positive and can be obtained by
Z  atb Z  atb
f
aDe f
aDe
D ¼ IðpÞ  2 dt ¼ ðehðtpÞ  1Þð Þdt: ð12Þ
p ð1 þ eatb Þ p ð1 þ eatb Þ2

The present worth of the fixed setup cost at the replenishment point n may be expressed as
FC ¼ F0 eRn : ð13Þ

The present worth of the purchasing/production cost at the replenishment point n may be expressed as
Z  atb Z  atb
n
aDe f
aDe
pC ¼ p0 eRn Q ¼ p0 eRn ð 2 dt þ ehðtnÞ ð 2 ÞdtÞ ð14Þ
s ð1 þ eatb Þ n ð1 þ eatb Þ

The present worth of the shortage cost over the period [s, p] may be expressed as
Z Z  atb
n
Rt S0 n
aDe
SC ¼ S0 e SðtÞdt ¼ ðeRt  eRp Þð 2 Þdt: ð15Þ
s R s ð1 þ eatb Þ

The present worth of the holding cost over the period [n, f] may be expressed as
3874 S.S. Ali et al.
Z Z  atb
f
G0 eRn f
aDe
GC ¼ G0 eRt IðtÞdt ¼ ðehðtnÞ  eRðtnÞ Þð 2 Þdt: ð16Þ
n Rþh n ð1 þ eatb Þ

The present worth of the deteriorating cost over the period [n, e] may be expressed as
Z !
Rn
f
hðtnÞ
 atb
aDe
DC ¼ D0 e ðe  1Þ 2 dt: ð17Þ
p ð1 þ eatb Þ

4.3 Solution procedure

The optimal replenishment schedule can be determined by the Wagner–Whitin (WW) approach over the planning hori-
zon, as given by Equation (19). The total cost is minimised by the WW approach which is a dynamic programming
model for solving the replenishment schedule and cycle over the planning horizon.

Wf ¼ minfWs þ Fðs; n ; f Þ; 0  s\f  Gg

W0 ¼ 0 ð18Þ

In the interval s  t  f, the present worth of the total variable cost (fixed setup, purchasing/production, holding,
shortage costs, and deteriorating costs) for each cycle is given by
Z Z f
 atb  atb
n
aDe aDe
Fðs; n; f Þ ¼ F0 eRn þ P0 eRn ð 2 dt þ ehðtnÞ ð 2 ÞdtÞ
s ð1 þ e
atb Þ ð1 þ eatb Þ
n
Z  atb Z  atb
S0 p Rt aDe G0 eRn f hðtnÞ aDe
þ ðe  eRn Þð Þdt þ ðe  eRðtnÞ Þð 2 Þdt þ D0 e
Rn
R s ð1 þ eatb Þ
2
Rþh n ð1 þ eatb Þ
Z f  atb
aDe
 ðehðtnÞ  1Þð 2 Þdt ð19Þ
n ð1 þ eatb Þ

The optimal replenishment point n can be obtained, for given s and f, from the following equation

@Fðs; n; f Þ
¼ 0;
@p

which can be written as

F0 ReRn

Z Z ! ! Z !
Rn
n  atb
aDe f
hðtnÞ
 atb
aDe Rn
f
hðtnÞ
 atb
aDe
p0 Re dt þ e dt þ p0 e he dt
s ð1 þ eatb Þ2 n ð1 þ eatb Þ2 n ð1 þ eatb Þ2

Z !
n
Rn
 atb
aDe
þS0 e 2 dt
s ð1 þ eatb Þ

Z ! Z !
G0 ReRn f
ðtnÞ RðtnÞ
 atb
aDe G0 eRn f MðtnÞ RðtnÞ
 atb
aDe
 ðe e Þ dt þ ðMe  Re Þ dt
Rþ p ð1 þ eatb Þ2 RþM p ð1 þ eatb Þ2
 International Journal of Production Research 3875

Z ! Z !
Rn
f
MðtnÞ
 atb
aDe Rn
f
hðtnÞ
 atb
aDe
D0 Re ðe  1Þ dt þ D0 e Me dt ¼ 0 ð20Þ
n ð1 þ eatb Þ2 n ð1 þ eatb Þ2

@ 2 Fðs;n;f Þ
The minimum cost is guaranteed in the interval s  t  f for the convex cost function, so that @p2 [0; where
Z Z ! !
2 Rn 2 Rn
n  atb
aDe f
MðtnÞ
 atb
aDe
F0 R e þ p0 R e 2 dt þ e 2 dt
s ð1 þ eatb Þ n ð1 þ eatb Þ

Z !
Rn
f
MðtnÞ
 atb
aDe
2p0 Re he dtÞ
n ð1 þ eatb Þ2

Z ! !!
f  atb
aDe  atb
aDe
þp0 eRn Me2 hðtnÞ
2 dt þ M 2
n ð1 þ eatb Þ ð1 þ eatb Þ

Z  atb  atb
Rn
p
aDe aDe
RS0 e 2 dt þ S0 eRn 2
s ð1 þ eatb Þ ð1 þ eatb Þ

Z !
H0 2 Rn f  atb
aDe
þ Re ðeMðtnÞ þ eRðtnÞ Þ dt
Rþh n ð1 þ eatb Þ2

Z !
2H0 f  atb
aDe
 ReRn ðMe hðtpÞ
þ Re RðtnÞ
Þ dt
RþM n ð1 þ eatb Þ
2

Z ! ! !!
H0 Rn f
2 MðtnÞ
 atb
aDe  atb
aDe
þ e he þR e 2 RðtnÞ
dt þ
RþM p ð1 þ eatb Þ2 ð1 þ eatb Þ2

Z !
2 Rn
f
hðtnÞ
 atb
aDe
þD0 R e ðe  1Þ 2 dt
n ð1 þ eatb Þ

Z !
Rp
f
hðtpÞ
 atb
aDe
2D0 Re Me 2 dt
p ð1 þ eatb Þ

Z ! !!
f  atb
aDe  atb
aDe
þD0 eRn M2 ehðtnÞ dt þ M ¼0 ð21Þ
n ð1 þ eatb Þ2 ð1 þ eatb Þ2

The forward method recursive procedure is used to calculate the minimum present worth of the total cost over a pre-
scribed time G. The optimal schedule and optimal cycle is determined from time G to 0 with the help of the backward
recursive procedure. Tf and n⁄s,f are defined below;
3876 S.S. Ali et al.

Table 1. Result with shortages permitted and time discounted.

Cycle [s, f] p⁄ F(s, p⁄,f) Lot size Amount of deterioration Wf

1 [0,3] 1.7517 125,425 450.643 4.1718 1,91,823

2 [3,5] 3.4323 214,781 612.291 6.6318 2,15,425
3 [5,7] 5.9133 380,101 1320.211 16.361 6,75,543
4 [7,9] 7.7536 682,271 2402.300 18.9931 1,189,67
5 [9,11] 9.6385 715,300 2510.230 9.99982 2,000,18
6 [11,13] 11.8929 410,800 1508.000 10.9854 2,512,09
7 [13,15] 14.0021 230,597 790.001 13.1234 2,599,99

Table 2. Replenishment schedule.

Cycle [s, f] p⁄ F(s, p⁄,f) Lot size Amount of deterioration Wf

1 [0,2] 0 76,543 210.543 21.3489 9,9,768

2 [2,4] 2 140,101 70.977 19.6433 1,49,169
3 [4,6] 4 273,099 788.889 18.7620 4,00,881
4 [6,7] 6 248,009 912.870 9.0054 6,78,534
5 [7,8] 7 320,151 1,199.770 12.1282 9,34,932
6 [8,9] 8 389,123 1,299.990 14.4539 1,500,712
7 [9,10] 9 392,989 1,320.870 14.4589 1,808,432
8 [10,11] 10 345,222 1,200.350 12.4201 2,167,079
9 [11,13] 11 420,896 1,450.780 27.0080 2,531,001
10 [13,18] 13 238,239 8,90.123 24.6829 2,876,924

Tf = start point of the last replenishment cycle from time zero to time f (i.e., [Tf, f]), Tf = 0, 1, 2,…, f-1, and f = 1, 2,…,
H, n⁄s,f = the optimal replenishment schedule for cycle [s, f].

5. Numerical illustration with sensitivity analysis

The implementation of the proposed dynamic programming techniques was conducted and the solution procedure is
illustrated by two examples. The first example models inventory replenishment which considers shortage and time dis-
counting effects in time. The second example is for wedding suits, which does not allow shortage due to the nature of
the product. The effect of the shortage on the replenishment schedule is demonstrated using the same data set as the first
example.
Example 1: A new model of digital tab (DT), is introduced to the market. The maximal accumulated demand D  for the
model is estimated to be 10,000 for the market, with the planning horizon H equal to 18 months. It is assumed that
when the shortage occurs, customers will wait for certain time periods to get the DT only if price discounts are awarded.
The price discount is compounded to the unit shortage cost S0 which is set to be Rs 1000. Other parameter values for
this example are assigned where α = 0.7, β = -3.5, h = 2.5%, R = 1.5% per time period, F0 = Rs 1000000 per replenish-
ment, p0 = 10, G0 = Rs 400, and D0 = Rs 210 during the planning horizon.
Table 1 gives the detailed data of the replenishment schedule and the costs for this example. In the optimal schedule,
the present worth of the minimal total cost is Rs 2, 599, 99, the total quantity over the planning horizon is 8988, the
total deterioration is 70, the average unit cost (AUC) is Rs 292070, and the optimal number of replenishment cycles is
seven.
Example 2: A new style of wedding suit is introduced on the market. The maximal accumulated demand D  for the style
is estimated to be 9000 for the market, with the planning horizon G equal to 18 weeks. It is, however, assumed that
when a shortage occurs, the customer’s sale will be lost, that is to say that shortages are not allowed. The shortage cost
S0 is thus assigned with a very large value, in this example NTRs 15,000.
Other parameter values for this example are assigned where α = 0.5, β = -4.5, h = 2%, R = 1% per time period, F0 = NTRs
25,000 per replenishment, p0 = NTRs 300, H0 = NTRs 150, and D0 = NTRs 350 during the planning horizon. Table 2
gives the detailed data of the replenishment schedule and the costs for this example. In the optimal schedule, the present
 International Journal of Production Research 3877

worth of the minimal total cost is Rs 2,876,92, the total quantity over the planning horizon is 9062, the total deteriora-
tion is 143.3145, the AUC is Rs 20096.61, and the optimal number of replenishment cycles becomes 10.

6. Conclusion
The buying behaviour of users plays an important role in predicting the demand and correspondingly the inventory of
the system. The demand of a product or service is affected on account of imitation effects. For dealing with products
having short life-cycles such as high-tech products, seasonal products and fad products, the traditional constant demand
assumption is not workable. For a variety of products the logistic model whose properties are very similar to that of
product life cycle model can be used for long or short product life cycles. In such inventory models, a logistic approach
can be used effectively. It has been proposed in this study that, for deteriorating items, the original Wagner–Whitin
approach can be extended as has been done in IFS replenishment policy under both inflationary and time discounting
environments. Variations in ordering size, frequency of the orders, and service levels are permitted in this model. For
further aspirants, the natural extension is consideration of more complicated and practical conditions such as the varia-
tion of lead time, the decline of both buying and selling price, quantity discount, and the promotion of the product. Fur-
ther, one limitation of the continuous type of inventory review is the cost of implementation, including things such as
bar code scanners, inventory software, etc., and which could increase overall cost.

Acknowledgements
The work described in this paper was substantially supported by a grant from the Research Grants Council of the Hong Kong Special
Administrative Region, China (project number PolyU 510311). The authors also would like to thank the Hong Kong Polytechnic
University Research Committee for financial and technical support.

Note
1. J. Madaan’s current address is DMS, Indian Institute of Technology, Delhi, India.

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