Two-warehouse inventory model on pricing decision

Abstract

This paper develops a structural Economic Order Quantity (EOQ) model that evaluates the impact of a reduction rate in the selling price when the capacity of an Own Warehouse (OW) is limited and a Rented Warehouse (RW) is used, if needed. In many practical situations, there exists many factors to consider such as temporary price discounts, the limited capacity of OW houses, and transportation problems. Retailers need to build a new warehouse or rent other warehouses. However, from an economical point of view, they usually choose to rent other warehouses. However, in industries such as the textile and footwear industry or the food processing industry, after an certain time, the items decay or deteriorate. When this happens, a good manager wants to clear the stock by selling the huge items at reduced prices. In this paper the demand rate up to the start of deterioration is considered to be fixed and after that time, the new demand rate is considered to be a nonlinear increasing power function of the reduction rate. Possible associated profit functions affected by the trade off in inventory such as the own warehouse and rented warehouse holding costs, set up costs, the purchasing costs, the selling prices are discussed analytically and also solved using a Genetic Algorithm (GA) with numerical illustrations.

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