Optimal order policy for deteriorating items with inflation induced demand

This paper presents the optimal inventory replenishment policy of deteriorating items under inflationary conditions using a discounted cash flow (DCF) approach over a finite planning horizon. A DCF approach permits a proper recognition of the financial implication of the opportunity cost and out-of-pocket costs in inventory analysis. It also permits an explicit recognition of the exact timing of cash-flows associated with an inventory system. The demand rate is assumed to be a function of inflation; shortages are allowed and completely backlogged. Optimal solution for the proposed model is derived and the effects of deterioration and inflation on the optimal inventory replenishment policy are studied with the help of numerical example.