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Optimal lot sizing under continuous price decrease

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  • Khouja, Moutaz
  • Park, Sungjune

Abstract

An important characteristic of high-tech industries is decreasing component prices over time. In the personal computer industry, some component prices decline at a rate of 1% per week. This paper develops an inventory model for products experiencing continuous decrease in unit price. We develop an accurate closed-form approximate solution to the model. Our results indicate that declining prices lead to substantial decrease in the optimal cycle time and much frequent ordering. This explains the heavy emphasis on just-in-time inventory management practiced by successful companies in high-tech industries. While previous models attributed the success of just-in-time policies to reduced holding cost and improved quality, under declining prices a substantial source of savings becomes lower costs of raw materials which is significant part of cost in these industries. We illustrate the results of the model with a numerical example and perform sensitivity analysis.

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  • Khouja, Moutaz & Park, Sungjune, 2003. "Optimal lot sizing under continuous price decrease," Omega, Elsevier, vol. 31(6), pages 539-545, December.
    • Handle: RePEc:eee:jomega:v:31:y:2003:i:6:p:539-545
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Pentico, David W. & Drake, Matthew J. & Toews, Carl, 2009. "The deterministic EPQ with partial backordering: A new approach," Omega, Elsevier, vol. 37(3), pages 624-636, June.
    2. S Banerjee & N S Meitei, 2010. "Effect of declining selling price: profit analysis for a single period inventory model with stochastic demand and lead time," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 61(4), pages 696-704, April.
    3. Panda, S. & Modak, N.M. & Sana, S.S. & Basu, M., 2015. "Pricing and replenishment policies in dual-channel supply chain under continuous unit cost decrease," Applied Mathematics and Computation, Elsevier, vol. 256(C), pages 913-929.
    4. Canyakmaz, Caner & Özekici, Süleyman & Karaesmen, Fikri, 2022. "A newsvendor problem with markup pricing in the presence of within-period price fluctuations," European Journal of Operational Research, Elsevier, vol. 301(1), pages 153-162.
    5. Kevin Hsu, Wen-Kai & Yu, Hong-Fwu, 2009. "EOQ model for imperfective items under a one-time-only discount," Omega, Elsevier, vol. 37(5), pages 1018-1026, October.
    6. Yang, P.C. & Wee, H.M. & Liu, B.S. & Fong, O.K., 2011. "Mitigating Hi-tech products risks due to rapid technological innovation," Omega, Elsevier, vol. 39(4), pages 456-463, August.
    7. Yao, Ming-Jong & Chu, Weng-Ming, 2008. "A genetic algorithm for determining optimal replenishment cycles to minimize maximum warehouse space requirements," Omega, Elsevier, vol. 36(4), pages 619-631, August.
    8. Khouja, Moutaz & Goyal, Suresh, 2006. "Single item optimal lot sizing under continuous unit cost decrease," International Journal of Production Economics, Elsevier, vol. 102(1), pages 87-94, July.
    9. Schotanus, Fredo & Telgen, Jan & de Boer, Luitzen, 2009. "Unraveling quantity discounts," Omega, Elsevier, vol. 37(3), pages 510-521, June.
    10. Taleizadeh, Ata Allah & Zarei, Hamid Reza & Sarker, Bhaba R., 2017. "An optimal control of inventory under probablistic replenishment intervals and known price increase," European Journal of Operational Research, Elsevier, vol. 257(3), pages 777-791.
    11. Ramasesh, Ranga V., 2010. "Lot-sizing decisions under limited-time price incentives: A review," Omega, Elsevier, vol. 38(3-4), pages 118-135, June.
    12. Sharma, Ashish & Banerjee, Snigdha, 2013. "Optimal price markup policy for an inventory model with random price fluctuations and option for additional purchase," International Journal of Production Economics, Elsevier, vol. 146(2), pages 620-633.
    13. Suresha Kharvi & T. P. M. Pakkala, 2021. "An optimal inventory policy when purchase price follows geometric Brownian motion process," OPSEARCH, Springer;Operational Research Society of India, vol. 58(4), pages 835-851, December.
    14. Berling, Peter, 2008. "The capital cost of holding inventory with stochastically mean-reverting purchase price," European Journal of Operational Research, Elsevier, vol. 186(2), pages 620-636, April.
    15. Abedinnia, Hamid & Moghaddamkia, Hoda & Glock, C. H., 2016. "A joint economic lot size model under continuously increasing purchase prices of raw materials," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 82129, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    16. Sarkar, Biswajit & Saren, Sharmila & Wee, Hui-Ming, 2013. "An inventory model with variable demand, component cost and selling price for deteriorating items," Economic Modelling, Elsevier, vol. 30(C), pages 306-310.
    17. Teunter, Ruud, 2005. "A note on "Khouja and Park, optimal lot sizing under continuous price decrease, Omega 31 (2003)"," Omega, Elsevier, vol. 33(6), pages 467-471, December.
    18. Canyakmaz, Caner & Özekici, Süleyman & Karaesmen, Fikri, 2019. "An inventory model where customer demand is dependent on a stochastic price process," International Journal of Production Economics, Elsevier, vol. 212(C), pages 139-152.
    19. Ya Gao & Guangquan Zhang & Jie Lu & Hui-Ming Wee, 2011. "Particle swarm optimization for bi-level pricing problems in supply chains," Journal of Global Optimization, Springer, vol. 51(2), pages 245-254, October.
    20. P C Yang & H M Wee & J C P Yu, 2007. "Collaborative pricing and replenishment policy for hi-tech industry," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 58(7), pages 894-900, July.
    21. Yusen Xia, 2016. "Responding to supplier temporary price discounts in a supply chain through ordering and pricing decisions," International Journal of Production Research, Taylor & Francis Journals, vol. 54(7), pages 1938-1950, April.

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