Chapter 1: Introduction

The study is an extensive take on the implications that the effects of inflation can have
over inventory management. Inventory are held in order to manage and hide from the
customer the fact that manufacture delay is longer than delivery delay, and also to ease
the effect of imperfections in the manufacturing process that lower production
efficiencies if production capacity stands idle for lack of materials.
The sales department of any organization believes that the company should have
available any item to have immediate sales for as large a quantity as demanded, which
requires large stocks to be maintained. Similarly, the purchase department wants to buy
as much inventory as possible at the time of purchase to take advantage of price
discounts. However, the finance department believes that inventory ties up large amounts
of working capital and upsets the cash flow. The conflicting objectives of cost control
and customer service often pit an organization's financial and operating managers against
its sales and marketing departments. This conflict can be minimized by reducing
production time to being near or less than customer expected delivery time.
Control of the inventory should not be left to one department only. Other
departments too contribute to the process of inventory control. The control is at its best
when there is coordination between sales, production and materials supply department.
The management should ensure that all the concerned departments interact regularly with
each other to control the finished goods inventories so that the advantage of
interdisciplinary approach is not lost.
Ultimately the size of an appropriate balanced inventory investment must be
justified in terms of the extent to which it contributes to the effectiveness of overall
organizational policies and profitability. Such justifications usually contain significant
subjective judgments.
As inventory represents a very important part of the company’s financial assets, it
is very much affected by the market’s response to various situations, especially inflation.
Inflation is a global phenomenon in present day times. Inflation can be defined as that
state of disequilibrium in which an expansion of purchasing power tends to cause or is
the effect of an increase in the price level. Inflation is the primary reason that companies
need to put so much effort into valuing their inventory.

1
 The effect of time, storage conditions, weather conditions etc. are those factors
which affect the quantity and quality of stock stored in the warehouse. Various kinds of
materials are stored in the warehouse. Each material has its own characteristics. Some of
the materials are affected by environmental conditions, the method of storage or the time
of storage. All these factors are sufficient in themselves to ensure that the materials be
stored properly and adequately so there is minimum possible loss to the management by
way of decay, deterioration or pilferage. However, no matter how much precautions one
takes, there is still some or the other kind of loss to the inventory due to unavoidable
conditions. These conditions call for a detailed discussion upon the theory of
deteriorating or decaying inventory materials.
In today’s highly competitive market, inventory and financial decisions are so
closely correlated that individual decisions do not make any sense. The financial control
of inventory in all lines of activity in which they comprise a substantial part of the current
assets is frequently the most important problem in the management of working capital.
Management of inventory is designed to regulate the size of the management in goods on
hand, the types of goods carried in stock and turn over rates. Adequate stocks of goods of
proper quality to meet the needs of production and sales must be maintained, while at the
same time the investment in them is kept at a minimum.
This forecasting and managing of inventories needs proper modeling and analysis
of the system representation. Throughout in our study we have strived to achieve this
very goal, by first formulating a mathematical model of the system, and then solving it
for optimizing the situation under the given circumstances.
The whole study has been divided into ten chapters in all. Each chapter has been
devoted to the development and exploration of a particular theme in inventory modelling.
The work undertaken here is to study the effects that the phenomenon of inflation has
over inventory. Using the Discounted Cash Flow (DCF) approach, we have studied
various aspects of inflation. The study is unique in itself, in that it undertakes to study
inventory models in different business environments and situations.

2
 Chapter 2: Literature Review

The second chapter deals with a review of the available literature in the field of
inflationary implications on inventory models with deterioration factor involved. There
has been an assortment of work done on various inventory systems under different
conditions and business environments.
These have been taken into consideration in the next chapter. We have tried to
review the work done till date by categorizing it under several heads. Under each heading
we have done an extensive survey of work done in that field keeping in mind the central
theme of inflation. The survey has tried to explore different journals, both of national and
international level. Several books on inventory research have also been referred at
appropriate places.
For all this work, we referred various libraries of different institutions. An
extensive online survey was also conducted to gather latest information about some
journals not available in libraries. We have tried to explore as many journals as possible,
both of national as well as of international repute.
All in all, we have tried to get a full grasp on the subject area before venturing
into the field. We have attempted to give as recent references as possible.

3
 Chapter 3: Evaluation of a Practical Inventory Control and
Pricing Policy for Multi-Variate Demand Under Inflation

In this study, we have taken a very realistic demand rate that depends on two
factors, one is the stock level available, and the second is the selling price of the item.
This assumption takes the customer’s interests as well as the market forces into account.
The demand rate is such that as the inventory level increases, it helps to increase the
demand for the inventory under consideration. While as the selling price increases, the
demand suffers a setback, and the sales are reduced. This whole setup is very close to the
reality that is observed in the market.
The environment of the whole study has been taken as inflationary, as any study
done otherwise cannot justify itself under any circumstances. Since, it is unjustified to
assume that any item starts deteriorating as soon as it is produced, hence, the item has
been allowed a definite lifetime and deterioration sets in only after that. The competitive
nature of the market has been accounted for by taking partial, time dependent,
backlogging into consideration. The model is developed for a finite planning horizon.
The demand rate (units/unit time) of the inventory is given by, D(t) = η-θs+γI(t), η, θ
and γ are positive constants. The deterioration of the inventory follows the Weibull
instantaneous rate function Z( t ) = αβ t β−1 . λ is the lifetime of the commodity.
Backlogging parameter of the items, B = 1 [1 + δ(T − t )] , δ ≥ 0 , t is waiting time and

T1 ≤ t ≤ T . Mathematically, the system can be represented by the following system of

differential equations:
I1' (t) = -η + θs - γI1 (t) 0≤t ≤λ

I '2 (t) = -η + θs - γI 2 (t) - αβt β-1I 2 (t) λ ≤ t ≤ T1

-η + θs-γI3(t)
I 3' (t) = T1 ≤ t ≤ T
1 + δ(T-t)
The present worth of net profit is found by deducting various costs like ordering cost OC,
item cost IC, holding cost HC, shortage cost SC, and lost sales cost LC from the present
worth of net profit, P.
The total planning horizon H has been divided into N equal cycles. The inventory
starts at an initial level of I0 units and ends at zero in the final cycle. Hence, to satisfy the

4
unfulfilled backlogged demand at the end of the last cycle, an extra replenishment is
required at t = H. The total number of replenishments becomes N+1.
The first lot size is = I0
T
2 , 3 ,……., N lot size = I0 + ∫ D(t)dt
nd rd th

T1

T
(N+1)th lot size = ∫ D(t)dt
T1

P = SP − OC − IC − HC − SC − LC
The total profit, TP can be found from P, the present worth of net profit for one cycle.

(
TP = P 1 + e − rT + e −2rT + ....... + e − ( N −1)rT )
1 − e− rNT
=P
1 − e− rT
This is our objective function which needs to be maximized.
Optimal solution has been found corresponding to a set of numerical data assumed. This
optimal solution has been checked for sensitivity with respect to system parameters. The
system has shown a much better tolerance towards the changes in parameters α, β and δ
while it has proved more rigid for the parameters γ, η and θ. As is expected we observe,
that with an increase in demand (due to increase in parameter η), the manager is in a
position to increase the selling price, resulting in increased profits. However, as is quite
obvious, as the demand decreases (due to increase in parameter θ), the manager has to
reduce the selling price, which as a result cuts-off his profits.
The proposed model proves its worth as being more pragmatic by taking many
real marker fundamentals into its consideration. Also being a study done under the
assumed conditions of inflation, it becomes economically feasible. The numerical study
has also validated the theory. Further cases with more complex assumptions can be
developed.

5
Chapter 4: Replenishment Model With Time Varying Demand,
Production And Deterioration Rates In An Inflationary
Environment

Planning is the art of specifying meaningful information about the future. Long run
planning decisions require consideration of many factors: general economic conditions,
industry trends, probable competitor actions and so on. For proper management of system
resources, there must be an adequate knowledge base of the customer’s demand. But
demand is the most volatile of all the market forces, as it is the least controlled by
management personnel. Every change in demand is directly correlated to the production
rate of that particular commodity. Whenever the production rate of any inventory is
changed, it unswervingly affects the storage of that item in stock. Overall, it means that
every time the demand for any commodity goes a noticeable change, the inventory
manager has to reformulate the complete logistics of management for that item.
In the present study we have tried to create a model which does not stick to a
particular rate of production or demand or deterioration, but all the rates are kept variable.
The flexibility of this kind of approach is in itself sufficient to justify itself in the eyes of
the top management. Now, whenever there is a change in the customer’s preference, all
that inventory manager has to do, is to consider the new data provided to him and use the
results of the present study to arrive at the new policy.
Considering p(t) to be the rate of production, q(t) to be the rate of demand, where
p(t) > q(t), and θ(t) to be the rate of deterioration, we can formulate the model as follows:
I1' (t) + θ(t)I1 (t) = p(t) − q(t) T0 ≤ t ≤ T1

I 2 ' (t) + θ(t)I 2 (t) = −q(t) T1 ≤ t ≤ T2

I3' (t) = −β q(t) T2 ≤ t ≤ T3

I 4 ' (t) = p(t) − q(t) T3 ≤ t ≤ T4

Here, all p(t), q(t) and θ(t) are continuous functions of time. β(0< β <1) is the constant
rate of partial backlogging.
After computing the average cost for the period under consideration, we follow
two different approaches, one for an infinite planning horizon and another for finite
planning horizon.

6
 In both the cases equations are formed which when solved give us the optimal
solution for a set of numerical data. Both these cases are solved completely with the help
of certain numerical values for the system parameters. With the values obtained for the
total cost of operating the system, we arrive at the conclusion that the finite planning
horizon model is way better than the infinite planning horizon model. Also, the infinite
horizon model professes a cycle time of more than 27 years, when the production has
been actually stopped within one year of commencing it. This is a great disparity, hence
this model does not appear feasible under the current circumstances.
In this chapter we have been able to fabricate a model which boasts of litheness in
terms of production rate, demand rate as well as deterioration rate. Today, when the
demand for any particular item changes overnight, due to a change in customer’s
expectations, the producer requires a model which can be changed accordingly and give
suitable results.
In totality this model can present itself as a remedy for the quick changes in the
market performance of any product and hence, can act as a savior for the inventory
manager by offering him quick remedies. The model has also been exemplified
numerically and it has proved itself financially viable also.

7
 Chapter 5: On Reserve Money for an EOQ Model in an
Inflationary Environment under Supplier Credits

The purpose of every business enterprise is to earn as much profit as possible while
providing an adequate service level to its customers. The focus on customer service has
gradually changed over the years and suppliers are now becoming really interested in
customer service instead of just talking about it.
Every venture thrives on a customer policy which best suits its needs. Vendors
sometimes offer concessions or credit limits to their customers. They are allowed a
certain time period to settle the accounts. Till the end of this time period, the customer is
free to clear the financial credit at any time and is not required to pay any interest or
penalty. However, at the end of the credit limit he has to either pay the balance or the
supplier starts to charge an interest on the amount due to him.
However, a situation which has been ignored by the researchers as yet is when the
customer has the funds to make the payment at the initial time of transaction, but he still
decides to avail the credit limit. This way, his cash stays with him, while he also gets the
goods without having to pay for them. This line of thought has not, as yet, received any
attention from the research world. But this is a situation which presents itself as more
intimidating and full of opportunities. In our study, we have strived to study this very
situation only.
Considering D(t) to be the demand rate, θ(t) to be the deterioration rate, and B to
be the backlog rate, we represent the system mathematically by the following system of
differential equations:
I1' (t) = − D(t) − θ(t)I1 (t) 0 ≤ t ≤ T1 , where I1 (T1 ) = 0

I '2 (t) = − BD(t) T1 ≤ t ≤ T , with I 2 (T1 ) = 0

Two different cases have been studied and explored. In one case the credit limit finishes
off before the inventory can be sold off, and in the other case, the inventory gets sold off
before the credit limit gets finished.
In both the cases, the total cost of the system is obtained as:
TC = SPC + PC + HC + SC + LC − IE
where SPC is setup cost, PC is production cost, HC is holding cost, SC is shortage cost,
LC is lost sale cost while IE is the interest earned during the whole period.

8
 The inventory starts with an initial level of I0 units and ends with shortages. In the
next cycle, replenishment of the stock clears up the backlog and builds the inventory
level back to I0. But in the last cycle, the replenishment is only for clearing up the
backlog and the inventory level returns to zero. Hence, the total number of
replenishments becomes N+1.
The first lot size is = I0
T
2nd, 3rd,……., Nth lot size = I0 + ∫ D(t)dt
T1

∫ D(t)dt
st
(N+1) lot size =
T1

(
TC′ = TC 1 + e − rT + e −2rT + ....... + e − ( N −1)rT )
1 − e− rNT
= TC
1 − e− rT
This is our objective function which needs to be minimized. We have solved the model
numerically for three different credit limits, and the optimal solution obtained in all the
three cases has been checked for sensitivity.
With increasing credit limit, the amount of initial inventories has increased while
the total cost of the system goes on decreasing with an increase in credit limit for the
same length of cycle. A single cycle through the entire planning horizon gives the
optimal solution in all the three cases. And amongst the three solutions, the one with the
highest credit limit provides more interest earning period and more time to sell off his
stock to the retailer and hence proves to be the most profitable situation for him.
The sensitivity analysis of the solutions portrays their stability very clearly. All
the variations in solutions have been depicted graphically too.
The convexity of the total cost of the system has been elaborated unmistakably
with the help of a graph, which shows that the optimal solution not only exists but is also
unique. The model, after being developed analytically, is solved numerically for three
different credit limits for different number of cycles of a fixed planning horizon.

9
 Chapter 6: Two Warehouse Inventory Model with Bulk-
Release Rule in Inflationary Setting

Storing of inventory is an essential element of inventory management. The way an

organization stores its inventory, goes a along way in deciding whether the organization
has been able to achieve the real goal of inventory management. The supplies are stored
by the inventory manager in the warehouse of the organization. The condition and
facilities provided at the warehouse influences the inventory policy as well as the
ultimate loss or gain to the owner.
Sometimes the overall requirement of an item is such that the supplier is
influenced into buying more than he can store in his warehouse. He may have been
influenced into doing so by an offer of a discounted price, or a season of large sale ahead,
or an impending strike, or stock-out or a lock-out etc. Under such circumstances, he is
compelled to rent another warehouse to stock the excess items.
Selecting the location and the layout of the warehouse contributes greatly to the
productivity of the venture and its efficiency. A properly planned, maintained and
executed plan goes a long way in maintaining the efficient operation of the business. But
sometimes the location of the RW is such that a direct sale from the RW is not possible.
In such a case the supplier has to transport the goods from the RW to the OW from where
they are subsequently sold.
In one of the warehouses we have considered time varying linear deterioration
and in the other we have taken Weibull rate of decay. There are certain items like
essential commodities which can’t be allowed to go out of stock, so we have not allowed
shortages to occur in our setup. The stocks are transferred from the RW to the OW
following a bulk release rule. The aim here is to find the optimal quantity that should be
ordered and the optimum number of cycles in which the quantity from RW should be
transferred to OW to maximize the net profit per unit time.
Considering D(t) to be the demand rate, θ(t) to be the deterioration rate, we can
represent the system by the following differential equations:
For OW:-
I1' (t) = −θ(t)I1 (t) − D(t) Ti ≤ t ≤ Ti +1

Where I(Ti ) = W , i = 0, 1, 2,…., n-1. For i = n I(Ti ) = 0

10
For RW:-
I '2 (t) = − Z(t)I 2 (t) Ti ≤ t ≤ Ti +1

Where I(Tn −1 ) = 0 , and i = 0, 1, 2,…., n-2.

The present worth of net profit is found by deducting various costs from the sales profit.
P = SR − SPC − IC − HC − HCRW − TrC

where SR is the sales revenue, SPC is setup cost, IC is item cost, HC is holding cost in
own warehouse, HCRW is holding cost in rented warehouse, TrC is cost of transportation
from the RW to OW.
The model has been exemplified with a variety of data sets for system parameters.
We observe that as the storage capacity of OW is decreased, the quantity to be ordered
obviously decreases and the cost also goes down. We observe that the optimal number of
cycles comes out o be one in all the examples taken in the study. This is in accordance
with the desire to lower the transport cost as much as possible.
The different variations of the solutions of the system have been depicted
graphically also to extend a clear understanding of the model.
The model presents ample scope for further extension and development.

11
 Chapter 7: Fuzzy Systems for the Inflationary Implications in
a Stock Dependent Demand Production Model

Since its inception years ago, theory of fuzzy sets has advanced in a variety of ways and
in many disciplines. One of the fields in which fuzzy sets have been applied most
extensively is in modeling for managerial decision making. The usefulness of
mathematical language for modeling purposes is undisputed. However, there are limits to
the usefulness and the possibility of using classical mathematical language, based on the
dichotomous character of set theory to model particular systems. An argument which is
only convincing if it is precise loses all its force if the assumptions on which it is based
are slightly changed. At such times, there arises a need for a language which can take into
consideration the impreciseness of the situation and form the model accordingly. Fuzzy
mathematical programming is the recourse for such a situation.
Fuzzy mathematical programming problems can be classified on the basis of two
concepts. The first concept is the fuzziness of the decision maker’s aspirations with
respect to goals and/or constraints. The other one is the ambiguity of the coefficients of
the objective function and/or constraints. Combination of these two concepts gives
different types of fuzzy mathematical programming problems.
In the present study we venture to develop a production model for an item with
stock dependent demand rate and constant deterioration in an inflationary environment.
All the cost parameters involved in the study are represented by fuzzy numbers. As a
result the total cost function is ultimately obtained as fuzzy. Later on this cost function is
defuzzified to obtain a crisp cost function with allowed variations. This is solved and
analyzed theoretically.
The problem has been formulated in two steps. In the first step, we formulate a crisp
model and then in the next step, we extend the model into a fuzzy form. We consider D(t)
to be the demand rate, K to be the production rate and θ(t) to be the deterioration rate.
The crisp formulation of the model has been presented here:
I1' (t) + θ(t)I1 (t) = K − D(t) 0 ≤ t ≤ T1

I 2 ' (t) + θ(t)I 2 (t) = − D(t) T1 ≤ t ≤ T2

In crisp sense, our problem is to maximize the average net total profit, i.e.

12
 sSP(T2 ) − c1HC(T2 ) − cPC(T1 ) − a
Max NP =
T2
where SP is the sales revenue , PC is production cost, HC is holding cost and a is the
setup cost.
When we fuzzify the profit goal, selling price, holding cost, production cost and the setup
cost, we arrive at the following fuzzified average net profit function:
~ ~ ~ ~
~ sSP(T2 ) − c1 HC(T2 ) − c PC(T1 ) − a
Max NP =
T2
Various costs of the systems have been defined by triangular fuzzy numbers. Using these
definitions we arrive at the defuzzified form of the fuzzy problem:
Max α

Subject to NR ( Q, α ) ≥ Z − z0 (1 − α )
1/ n 0
,

where Q ≥ 0, α ∈ [ 0,1]

NR ( Q, α ) =
1
T2 ⎢⎣ 2 ( 0 )1 p p0 (
⎡SR ( T ) S − s (1 − α )1/ ns − PC ( T ) C + c (1 − α )1/ n p
)
(
− HC ( T2 ) C1 + c10 (1 − α )
1/ n1
) − ( A + a (1 − α ) )⎤⎥⎦
0
1/ n a

The model has been solved numerically for both the crisp as well as the fuzzy form. The
profit as suggested by the fuzzy approach is far more practical and realistic and provides
better chances of attainment. All the different values involved in our study have also been
predicted by the fuzzy model and are more traceable.
The model has been developed for stock dependent demand and constant rate of
production with time dependent deterioration in inventory. The average net profit
function is the objective function in the case of crisp model. The same function when
fuzzified extends to give the fuzzy model of the situation. This model is later defuzzified
to a crisp model. The sensitivity analysis of the model suggests that the solution offered
by the study is quite stable.
The model amply suggests that the fuzzified form of the model gives far better
results than the crisp one.

13
 Chapter 8: Inflationary Implications on an Inventory with
Expiration Date, Capital Constraint and Uncertain Lead Time
in a Multi-Echelon Supply Chain

The series of firms that eventually make products and services available to consumers,
including all the functions enabling the production, delivery and recycling of the
materials, components, end products and services, is a supply chain. All products reach
the consumers via some kind of supply chain, some much larger and complicated than the
others. When individual firms in the supply chain make business decisions that ignore the
interests of other chain members, then this sub-optimization only transfers costs and
additional waiting time along the supply chain. This ultimately leads to higher end-
product prices, lower supply chain service levels, and consequently lower end-customer
demand. For this reason, supply chain management definitely needs some extra concern
on the part of the managers.
The uncertainty in the lead time of a supplier is such a phenomenon which has
deep roots in reality. Almost every supplier faces this problem at some time or the other
during his business deals. Another area which is comparatively untouched is the concept
of capital constraint for the supplier. However, as is very much evident from the face of
facts, this constraint is very common.
In the present study, we have strived to combine all the above mentioned factors
into a single problem. The lead time of the supplier is a probability density function of his
managing cost. The more the supplier is ready to spend as managing expenses, smaller
will be the lead time and vice versa. However, there is a constraint upon the amount the
supplier can afford to spend, hence there is capital constraint also involved. The product
starts deteriorating as soon as they reach the retailer, wherefore their demand also
decreases with decay. There is even an expiration date beyond which the product cannot
be used. Hence, the retailer plans out his cycle to finish off his inventory before the
product reaches its expiration date. As a matter of fact, the retailer takes the length of the
lifetime of the product to be his planning horizon and does not wish to retain inventory
after that date.
Mathematically the system can be represented as:
I 'r (t) = − BD(t) 0 ≤ t ≤ y , with I r (0) = 0

14
 I 'r (t) = -θI r (t) - D(t) y ≤ t ≤ T1 with I r (T1 ) = 0

We consider D(t) to be the demand rate and θ(t) to be the deterioration rate.
Computing the various costs involved in the study, we arrive at the following expression:
NPr = SR r − HC − PC − SPC

where NPr is the net profit of the retailer, SRr is the sales revenue of the retailer , HC is
holding cost .PC is production cost, and SPC is the setup cost.
In the case of the supplier we have the following expression for his total cost:
TC p = PC p + MC p + SC + LC

And for his profit:

NPp = SR p − TC p

where NPp is the net profit of the supplier, SRp is the sales revenue of the supplier , PCp is
production cost, MCp is managing cost, and SC is the shortage cost and LC is lost sales
cost. Hence, the supplier’s expected profit NPp* becomes
0 ∞
NP = ∫ NP f (y)dy + ∫ NP f (y)dy
*
p p p
−∞ 0

Similarly, the supplier’s expected cost TC*p becomes

0 ∞
TC = ∫ TC f (y)dy + ∫ TC f (y)dy
*
p p p
−∞ 0

Now, with this theory in mind, we have the following optimization problem:
Max NPp* , Max NPr

Subject to TC*p ≤ X

The model has been solved numerically and the optimal solution achieved has been
checked for sensitivity with respect to various system parameters. Overall the system
shows a very good stability in itself and resists changes due to market forces or
customer’s preference. All these factors ultimately give way to the fact that the proposed
model is very suited to present day market conditions.
Here we have studied a multi echelon supply chain with some very realistic
assumptions. Till date, most of the researches have been done assuming a zero lead time
which is an unrealistic assumption which considers that an order placed is completed
instantaneously. Hence, in our study we have considered the existence of lead time. To
bring it more matter-of-fact, we have considered the lead time to be a random variable. In

15
addition to the above mentioned facts, we have also considered the product to be having
an expiration date. Obviously, beyond this date, the demand would be decreased to a
minimal. Also, we have put an upper limit at the amount the supplier can spend on
fulfilling the order.
All these facts together make this study very unique and matter-of-fact.

16
 Chapter 9: Analysis of the Effects of Inflation on a Supply
Chain Model in a Multi-Echelon System with Stocks
Decreasing Discretely

Information deeply affects every part of the supply chain. It serves as a connection
between various stages of a supply chain, allowing them to coordinate and maximize total
supply chain profitability. Information is an important driver that companies have used to
become both more efficient and more responsive. Another key decision involves what
information is most valuable in reducing cost and improving responsiveness within the
supply chain.
Managers can improve coordination within a supply chain by ensuring that every
participant in the chain, works to maximize total supply chain profits. One key to do this
is by ensuring that the objective any function uses to evaluate a decision is aligned with
the firm’s overall objective. This means that instead of talking about the costs or profits
of a single member of the chain, we extend the idea to the complete supply chain and talk
about joint total cost in its place.
In our present study we undertake to study a supply chain network for a multi
echelon system with a single producer and multi distributors, who in turn cater to multi
retailers down the chain. We have considered the rate of production of the supplier to
depend upon the demand of the distributors. Moreover, the demand of the distributors is
governed by the demand of the retailers. This way the demand reaching the producer is
exactly as much as is required ultimately at the end of the retailers. In the end, the whole
study has been carried out in an inflationary setting since there is no justification of a
study done otherwise. This way, the whole research caters to put forward some aspects of
a supply chain with some real world considerations and market deliberations.
For the retailer, we consider Dr to be the demand rate and θ to be the deterioration rate
Mathematically the cycle can be represented as,
iT2 (i + 1)T2
I 'r ( t ) = − D r − θI r ( t ) ≤t≤ , i=nr, nr+1, …2nr
ndnr ndn r
With OCr’’ denoting ordering cost, PCr’’ as the purchase cost and HCr’’’ as the holding
cost, we arrive at the total cost of the retailer as:
TC r = OC r ' '+ PC r ' '+ HC r ' ' '

17
When there are ‘pq’ retailers, the total cost is,
NC r = pqTC r
Let D d be the demand at the distributor’s end. Mathematically, we can represent the
model by the following differential equation,
iT2 (i + 1)T2
I 'd ( t ) = − D d − θI d ( t ) ≤t≤ , i =1,…, nd
nd nd
With OCd’ denoting ordering cost, PCd’ as the purchase cost and HCd’’ as the holding
cost, and TrCd’’ as the transportation cost, we arrive at the total cost of the distributor as:
TC d = OC d '+ PC d '+ Tr C d ' '+ HC d ' '
This is the cost for one distributor. When there are ‘p’ distributors, the total cost is,
NC d = pTC d

With P as the production rate of the producer, mathematically, we can represent the
producer’s cycle as:
iT2 (i + 1)T2
I 'p ( t ) = P − θI p ( t ) ≤t≤ , i = 0, 1,…, nd-1
nd nd
With the usual notations and SPC as the setup cost, we have the total cost of the supplier
as:
TC p = SPC + PC p '+ HC p '+ Tr C p '

The above three objective functions have been solved separately as well as together as
one single objective function. The model has been solved numerically for different
number of cycles in the planning horizon. The solutions obtained clearly define that the
optimal solution is that one which puts stress on the complete supply chain. This solution
has the capacity of justifying itself under the circumstances. This solution is obtained
from the combined objective function conveying the importance of information along the
chain.
Only this kind of a solution can offer the best deals to the customer and it is quite
obvious that there is only a single source of revenue in the whole supply chain and that is
the end customer. If the customer remains satisfied he is bound to come back and that
way every single participant is bound to reap benefits.

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 Chapter 10: Conclusion

The science of inventory management has gradually developed, not because the theories
have improved but because requirements have changed a lot over time. No longer is
inventory management a single problem but it is integrated into the whole of logistics of
supply. The break with the traditional concepts is that improvement is part of normal
work for everyone. The gradual development of the operations is led by the people
carrying out the different processes.
Inventory design decisions should be evaluated as a sequence of cash flows over
the duration of time that they will be in place. The present value of a stream of cash flows
is what that stream is worth in today’s dollars. Discounted cash flow (DCF) approach
evaluates the present value of any stream of future cash flows and allows management to
compare two streams of cash flows in terms of their financial value. DCF analysis is
based upon the fundamental premise that “a dollar today is worth more than a dollar
tomorrow” because a dollar today may be invested and earn a return in addition to the
dollar invested. This premise provides the basic tool for comparing the relative value of
future cash flows that will arrive during different time periods.
The key to success is simplicity of operation. The concepts can be complicated,
just as reality is, and the inventory management system has to reflect this. It does not
mean that actual day-to-day operation has to be difficult. In fact, the more sophisticated
the system, the more reliable it should be and the less effort to operate. However, a good
system requires setting up to operate properly and this requires good inventory
management. Most businesses which want to generate better profits have not recognized
the key role of inventory management in increasing turnover and reducing costs.
Control of the inventory should not be left to one department only. Other
departments too contribute to the process of inventory control. The control is at its best
when there is coordination between sales, production and materials supply department.
The management should ensure that all the concerned departments interact regularly with
each other to control the finished goods inventories so that the advantage of
interdisciplinary approach is not lost.
Inventory management is a collection of techniques developed by practical people
and proven in the real world. It is no use using general good management practice in this

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area when specific inventory control methods are required. These have taken many years
to develop and refine.
The development of inventory management is a dynamic activity, with new
approaches being made, techniques being refined and new challenges being met.
Successful inventory management is a balance between the use of basic techniques which
are easy to use and give reasonable results, and sophisticated techniques which can give
better controls if they are used properly. Modern inventory managers have the
opportunity to use better and more effective controls.
Our study in particular provides ample scope for further research and exploration.
For instance, we have considered dynamic but deterministic rates wherever required. All
these works can be further developed by considering a probabilistic frame of reference,
which can bring the study closer to reality. Every model developed in this study can be
further enriched by adding more pragmatic conditions of work, which will not only
render a more meaningful outlook to the work, but also be more helpful to the inventory
manager.

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