Note: An Application of the EOQ Model with Nonlinear Holding Cost to Inventory Management of Perishables

Mark Ferguson¹ • Vaidy Jayaraman² • Gilvan C. Souza³

¹College of Management, Georgia Inst. of Technology, Atlanta GA 30332; Địa chỉ email này đã được bảo vệ từ spam bots, bạn cần kích hoạt Javascript để xem nó.

²Department of Management, University of Miami, Coral Gables FL 33124; Địa chỉ email này đã được bảo vệ từ spam bots, bạn cần kích hoạt Javascript để xem nó.

³Robert H. Smith School of Business, University of Maryland, College Park MD 20742; Địa chỉ email này đã được bảo vệ từ spam bots, bạn cần kích hoạt Javascript để xem nó.

IM 10

Abstract

In this note, we consider a variation of the economic order quantity (EOQ) model where cumulative holding cost is a nonlinear function of time.

This problem has been studied by Weiss (1982), and we here show how it is an approximation of the optimal order quantity for perishable goods, such as milk, and produce, sold in small to medium size grocery stores where there are delivery surcharges due to infrequent ordering, and managers frequently utilize markdowns to stabilize demand as the product’s expiration date nears.

We show how the holding cost curve parameters can be estimated via a regression approach from the product’s usual holding cost (storage plus capital costs), lifetime, and markdown policy.

We show in a numerical study that the model provides significant improvement in cost vis-à-vis the classic EOQ model, with a median improvement of 40%.

This improvement is more significant for higher daily demand rate, lower holding cost, shorter lifetime, and a markdown policy with steeper discounts.

Keywords: Inventory, EOQ model, retailing, perishable products