European Journal of Operational Research 134 (2001) 1±16

www.elsevier.com/locate/dsw

Invited Review

Recent trends in modeling of deteriorating inventory

a,* b
S.K. Goyal , B.C. Giri
a
Department of Decision Sciences and MIS, Faculty of Commerce and Administration, Concordia University,
1455 De Maisonneuve Blvd. West Montreal, Que., Canada H3G 1M8
b
Department of Mathematics, Vivekananda College, Calcutta 63, India

Received 28 August 1999; accepted 13 July 2000

Abstract

This paper presents a review of the advances of deteriorating inventory literature since the early 1990s. The models
available in the relevant literature have been suitably classi®ed by the shelf-life characteristic of the inventoried goods.
They have further been sub-classi®ed on the basis of demand variations and various other conditions or constraints.
The motivations, extensions and generalizations of various models in each sub-class have been discussed in brief to
bring out pertinent information regarding model developments in the last decade. Ó 2001 Elsevier Science B.V. All
rights reserved.

Keywords: Inventory models; Deteriorating items

1. Introduction impact on modeling of such an inventory system

Most of the existing inventory models in the
literature assume that items can be stored inde®-
nitely to meet the future demands. However, cer-
tain types of commodities either deteriorate or
become obsolete in the course of time and hence
are unstable. For example, the commonly used
goods like fruits, vegetables, meat, foodstu€s,
perfumes, alcohol, gasoline, radioactive sub-
stances, photographic ®lms, electronic compo-
nents, etc., where deterioration is usually observed
during their normal storage period. Therefore, if
the rate of deterioration is not suciently low, its
*
Corresponding author. Fax: +1-514-848-8645.
E-mail address: sgoyal@vax2.concordia.ca (S.K. Goyal).
cannot be ignored.
Inventoried goods can be broadly classi®ed into
three meta-categories based on
(a) obsolescence,
(b) deterioration,
(c) no obsolescence/deterioration.
Obsolescence refers to items that lose their va-
lue through time because of rapid changes of
technology or the introduction of a new product
by a competitor. Style goods must be sharply re-
duced in price or otherwise disposed o€ after the
season is over. For example, spare parts for mili-
tary aircraft are style goods and they become ob-
solete when a replacement model is introduced.
Deterioration refers to the damage, spoilage,
dryness, vaporization, etc. of the products. The

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2 S.K. Goyal, B.C. Giri / European Journal of Operational Research 134 (2001) 1±16

products like foodstu€s, green vegetables, human which can be found in the review articles of Nah-
blood, photographic ®lm, etc., having a maximum mias [88] (Perishable Inventory Theory) and
usable lifetime are known as perishable products Raafat [100]. In 1991, Raafat [100] provided a
and the products like alcohol, gasoline, radioactive comprehensive survey on continuously deteriorat-
substances, etc. having no shelf-life at all are ing inventory models where the deterioration is
known as decaying products. Also, the shelf-life of considered as a function of the on-hand inventory.
some products can be inde®nite and hence they The objective of the present article is to review the
would fall under the no obsolescence/deterioration advances of deteriorating inventory literature after
category. Raafat's [100] survey.
In the present article, we will not consider the
replenishment policies for inventory which are
2. Classi®cation of the deteriorating inventory
subject to obsolescence. Also, considerable atten-
models
tion has not yet been given on modeling of such an
inventory system only because once the items be-
The inventory models available in the relevant
come obsolete they are not reordered. Very few
literature can be classi®ed broadly on the basis of
problems on obsolescence have been addressed by
shelf-life characteristics into the following three
the researchers, see [88] for references. Recently,
categories:
Cobbaert and Oudheusden [37] developed inven-
(i) Models for inventory with a ®xed lifetime
tory models for fast moving items subject to sud-
[81,89,99].
den death obsolescence. In their models, di€erent
(ii) Models for inventory with a random lifetime
cases of obsolescence risk are studied allowing
[66,70±74,77,79,80,82,83,87,96,102].
both shortages and without shortages in inventory.
(iii) Models for inventory which decays corre-
The cost related to the obsolescence risk could be
sponding to the proportional inventory decrease
found in the model developed by van Beek et al.
in terms of its utility or physical quantity.
[14] for simultaneous lot sizing and capacity
However, the random lifetimes in continuous re-
planning in multi-stage assembly networks.
view models are discussed under the title of ``ex-
Inventory problems for deteriorating items
ponential decay'', giving the impression that all
have been studied extensively by many researchers
models with random lifetimes can be grouped into
from time to time. Research in this area started
a lower level category of models with exponential
with the work of Whitin [126] who considered
distributed lifetimes.
fashion goods deteriorating at the end of pre-
Considerable amount of research work has
scribed storage period. An exponentially decaying
been devoted on decaying inventory systems. Nu-
inventory was developed ®rst by Ghare and
merous mathematical models have been proposed
Schrader [42]. They observed that certain com-
from time to time by di€erent researchers in order
modities shrink with time by a proportion which
to accommodate various realistic factors.
can be approximated by a negative exponential
As demand plays a key role in modeling of
function of time. This observation led to the
deteriorating inventory, researchers have recog-
modeling of the inventory items with decay pro-
nized and studied the following variations (or their
cesses by the di€erential equation
combinations) of demand from the view point of
dI…t† real life situations:
‡ hI…t† ˆ f …t†;
dt
2.1. Deterministic demand
where h is the constant decay rate, I…t† the inven-
tory level at time t, and f …t† is the demand rate at (i) Uniform demand [48,61,101].
time t. (ii) Time-varying demand [2,9±11,13,15±
Since then considerable work has been done on 17,19,22±25,29±31,33,34,44±46,49,50±52,56±60,
deteriorating inventory system, the details of 62,67,68,75,85,98,117,120,127±129].
 S.K. Goyal, B.C. Giri / European Journal of Operational Research 134 (2001) 1±16
(iii) Stock-dependent demand [38,43,47,90,92,
97,103,106].
(iv) Price-dependent demand [76,121,122].
2.2. Stochastic demand
(i) With known probability distribution
[71,73,77,80,102].
(ii) With arbitrary probability distribution
[4,5,39,74,82].
In developing the models, they have adopted
many of the usual assumptions in inventory, viz.
(a) allowing shortage or without shortage, (b) ®-
nite/in®nite replenishment rate, (c) ®nite/in®nite
planning horizon, (d) partial/complete/no back-
logging of unsatis®ed demand, (e) constant/vary-
ing deterioration rate, (f) zero/constant/known
distribution/unknown distribution lead time, (g)
single/multi-item inventory system, (h) single/
multi-stage production inventory system, etc.
Researchers have developed a number of in-
ventory models for deteriorating items with the
aim of incorporating various other realistic con-
ditions or constraints into it. With this perspec-
tive, the available models can be grouped as
following:
(i) Models with permissible delay in payments
[3,32,63,69,78,109,110,114].
(ii) Models with announced price increase [111±
113].
(iii) Models under available price discount [123].
(iv) Models under in¯ation and time value of
money [27,28,35,55,105,116].
(v) Models with two levels of storage facility
[18,26,64,93±95].
3. Inventory models for ®xed lifetime products
Fixed lifetime products have deterministic shelf
life i.e. if a product remains unused up to its life-
time, it is considered to be out-dated and must be
disposed o€. Important examples are human
blood used for transfusion, pharmaceutical prod-
ucts, most food products, photographic ®lm, etc.
The ®xed lifetime products in inventory are usually
depleted following either First-In-First-Out
3
(FIFO) or Last-In-First-Out (LIFO) issuing pol-
icy. It is, therefore, an important problem of
®nding the optimal ordering policy which is closely
related to that of ®nding suitable issuing policy for
such a perishable inventory system. Inventory
models for ®xed lifetime perishable products have
been studied by Nandakumar and Morton [89]
and Liu and Lian [81].
Nandakumar and Morton [89] derived near
myopic bounds on the order quantities and used
the bounds to evaluate the performance of the
resulting heuristics. The near myopic approach,
basically, casts any periodic inventory problem in
the framework of a newsboy problem and at-
tempts to bound the various newsboy parameters.
The upper and lower bounds of various parame-
ters lead to bound on the order quantity.
Liu and Lian [81] analyzed an …s; S† continuous
review perishable inventory system with a general
renewal demand process and instantaneous re-
plenishments. Using a Markov renewal approach,
they obtained closed-form solutions for the steady
state probability distribution of the inventory level
and system performance measures. They also
constructed a closed-form expected cost function
and showed that for any ®xed S, the cost function
is either monotone or convex in s.
Perry [99] considered a perishable inventory
system where the commodity's arrival and cus-
tomer demand processes are stochastic and the
stored items have a constant lifetime. The stock
level is represented by the amount arriving during
the life of the oldest item and it is assumed to
¯uctuate as an alternating two-sided regulated
Brownian motion between barriers 0 and 1. Hit-
tings of level 0 are outdatings and hittings of level
1 are unsatis®ed demands. A useful martingale is
introduced for analyzing the controlled process as
well as the total expected discounted cost.
4. Inventory models for random lifetime products
The products whose exact lifetime cannot be
determined in advance while in stock are known as
random lifetime products. A typical example is
fresh produce whose time of spoilage is uncertain
and as a result the lifetime is assumed to be a
4 S.K. Goyal, B.C. Giri / European Journal of Operational Research 134 (2001) 1±16
random variable. The analysis of random lifetime
perishable inventory system is considerably more
dicult as compared to its ®xed lifetime counter-
part. Most of the models on continuously reviewed
inventory systems deal with an instantaneous
supply of items. A few Markovian …s; S† systems
with zero lead time have been studied by Kalpa-
kam and Arivarignan [70], Liu [79] and Pal [96].
Moorthy et al. [87] proposed an inventory
model in which an item is put on display and be-
comes available only after the presently displayed
item is sold or expired. The aging process of an
item is assumed to begin after it is put on display.
They analyzed the model with an Erlang lifetime
distribution, a renewal demand process and a zero
lead time.
A stochastic dynamic programing model was
developed by Jain and Silver [66] to determine the
optimal ordering policy for a random lifetime
perishable or potentially obsolate product. They
considered the product lifetime as a discrete ran-
dom variable which follows an arbitrary proba-
bility distribution. At the end of each discrete
period, the total remaining inventory is assumed to
be worthless or unusable for at least the next pe-
riod. They also presented two approximate solu-
tion methods based on Silver±Meal heuristic and
Wagner±Whitin algorithm. Krishnamoorthy and
Varghese [77] studied a continuous review …s; S†
inventory system with Poisson demand where
commodities are assumed to be damaged due to
decay and disaster. They considered the lifetime of
an item and times between the disasters to be ex-
ponential and derived the transient and steady-
state probabilities assuming no shortage and zero
lead time in inventory.
When a positive order lead time is introduced in
the problem the analysis becomes extremely com-
plex. Kalpakam and Sapna [71] analyzed an …s; S†
perishable system with Poisson demands and ex-
ponentially distributed lead times for items with
exponential lifetimes. They derived an exact cost
function and obtained some useful analytical
properties regarding the reorder point s assuming
that the number of outstanding replenishment
orders is restricted to be one and the demands
during the stock out periods are lost completely.
Kalpakam and Sapna [73] also dealt with an …s; S†
perishable system with Poisson demands and ar-
bitrarily distributed lead times for items with
constant failure rates.
Ravichandram [102] studied a similar model
with a Poisson demand process, a constant lifetime
and a random lead time with a general distribu-
tion. He also allowed only one outstanding re-
plenishment order and assumed that the aging of
the fresh stock begins only after all remaining old
units are depleted. Liu and Yang [83] considered
the case when the replenishment lead time is ex-
ponential and no restriction is placed on the
number of outstanding orders. They obtained a
matrix-geometric solution to the steady-state
probability distribution of the inventory level.
Kalpakam and Sapna [72] extended Pal [96]'s
work to the case with a general lead time distri-
bution. They used the Markov renewal technique
to analyze the behavior of the inventory level
process. The same technique is used by them [74]
to present a lost sale …S 1; S† perishable inven-
tory system with renewal demand and exponen-
tial life and lead times. In this case, since the
output process is not renewal, they speci®ed the
inventory level process as a semiregenerative
process and then employed the usual Markov
renewal techniques to obtain various operating
characteristics.
Liu and Cheung [80] developed a single item
continuous review inventory models with Poisson
demands, exponentially distributed lifetimes and
replenishment lead times including all the possi-
bilities of partial backlogging, complete backlog-
ging and complete lost sales. They analyzed the
models via a continuous time Markov chain and
derived a few steady-state system performance
measures including the average stock failure de-
pletion rate, e€ective demand rate, stock replen-
ishment rate, expected inventory levels and
expected customer waiting times. Based on these
results, they determined the optimal control policy
for the inventory system.
Recently, Liu and Shi [82] reconsidered the
model of Liu [79] with a general renewal demand
through a Markov process. They assumed that
the demands are singleton and follow a renewal
process with inter-demand time distribution
function
 S.K. Goyal, B.C. Giri / European Journal of Operational Research 134 (2001) 1±16
 Z t 
f …t† ˆ 1 exp l…x†dx ;
0
where l…t† is the hazard rate (probability intensity
that a demand will occur t time units after the
previous demand).
They derived a fundamental rate conservation
theorem and showed that by the expected reorder
cycle length, all the other system performance
measures can be obtained easily and the total long
run cost rate function can be reduced to a very
simpli®ed form.
Aggoun and his co-workers [4±7] made signi®-
cant contributions by introducing ®ltering theory
to stochastic inventory systems of perishable items.
Aggoun et al. [4] introduced a parametric multi-
period integer valued inventory model for perish-
able items where the demands are assumed to be
random and each item in stock is assumed to
perish in period n with probability …1 an †;
0 < an < 1: They suggested various parameter es-
timators of the model using measure change
techniques and set an optimal stochastic control
formulation for the model.
In both ®xed and random lifetime perishability,
the utility of an individual product is assumed to
be constant. Although the utility deterioration of
individual product and the decay of the product
inventory level are conceptually di€erent, both
approaches measure the loss of perishable prod-
ucts by deterioration. But for the perishable
products like fresh vegetables, breads, fruits, dairy
products, etc., the utility decreases continuously
with time. The degree of deterioration of product
utility can be treated as a penalty cost. Fujiwara
and Perera [41] considered two types of penalty
cost functions ± a linear penalty cost function pt,
and an exponential penalty cost function a…ebt 1†
as the cost of keeping one unit of product in stock
until age t, a > 0, b > 0 and p being constants.
They obtained the closed forms of the economic
order quantities in both the cases by using a sec-
ond-order approximation of exponential terms.
Vaughan [118] developed a new model of the
perishable inventory system which recognizes and
incorporates the e€ects of consumer-realized
product expiration. Such expiration occurs when
units are expired at the time of sale or expire
5
within some short period of time subsequent to
purchase. He considered the age at which the
vendor outdates units as a decision variable and
analyzed the interaction between inventory or-
dering and outdate policy for a perishable item
with random lifetime. As such, the model repre-
sents a synthesis of the ®xed versus random life-
time perishable inventory literature.
5. Deteriorating inventory with deterministic de-
mand
5.1. Uniform demand
Most of the inventory models developed in the
last few years are based on non-stationary de-
mand. However, Raafat et al. [101] developed an
inventory model for deteriorating items with con-
stant demand rate and ®nite replenishment rate.
Heng et al. [61] integrated Shah [108]'s and Mishra
[86]'s models considering a ®nite replenishment
rate, constant demand rate and exponential decay
in inventory.
Goh et al. [48] considered two-stage perishable
inventory systems where demand is considered to
be for fresh items or for somewhat older items. The
®rst stage holds fresh items and the second stage
holds the older items. Inventory is issued according
to FIFO policy within each stage. The inventory
system has been analyzed under both restricted
policy (where the inventory in the ®rst stage is re-
served for requests of fresh items even when there
is no inventory in the second stage) and unre-
stricted policy (where the request of older items
can be satis®ed by items in the ®rst stage but only
when there is no inventory in the second stage).
Wee and Shum [124] studied an optimal re-
plenishment policy for deteriorating inventory in a
single level MRP system. Their analysis is based
on the traditional approaches by Wagner±Whitin,
the Silver±Meal and least-unit-cost methods.
5.2. Time-varying demand
The assumption of constant demand rate is not
always applicable to many inventory items (e.g.
6 S.K. Goyal, B.C. Giri / European Journal of Operational Research 134 (2001) 1±16
electronic goods, fashionable clothes, tasty foods,
etc.) as they experience ¯uctuations in the demand
rate. Many products experience a period of rising
demand during the growth phase of their product
life cycle. On the other hand, the demand of some
products may decline due to the introduction of
more attractive products in¯uencing customers'
preference. Moreover, the age of the inventory has
a negative impact on demand due to the loss of
consumer con®dence on the quality of such prod-
ucts and physical loss of the materials. This phe-
nomenon prompted many researchers to develop
deteriorating inventory models with time varying
demand pattern. In developing inventory models,
two kinds of time-varying demands have been
considered so far (a) continuous-time and (b) dis-
crete-time. Most of the continuous-time inventory
models have been developed considering either
linearly increasing/decreasing demand [D…t† ˆ
a ‡ bt; a > 0; b >< 0] or exponentially increasing/
decreasing demand [D…t† ˆ A eat ; A > 0; a >< 0]
patterns.
In the early 1990s, Haiping and Wang [53] de-
veloped an economic policy model for deteriorat-
ing items with time proportional demand and
obtained a closed form solution of optimum order
quantity. Xu and Wang [127,128] presented in-
ventory models for exponentially deteriorating
items with linearly time-varying demand. They
[127] obtained the optimal replenishment policy by
a dynamic programing recursion similar to Wag-
ner±Whitin algorithm.
Goswami and Chaudhuri [49] discussed the in-
ventory replenishment problem over a ®xed plan-
ning horizon for an item deteriorating at a constant
rate and with a linear trend in demand, shortages in
inventory being allowed. They restricted the re-
plenishment cycles to be of equal duration.
Inventory models have been developed so far
over a prescribed ®nite or in®nite planning hori-
zon. Chung and Ting [33] proposed ®rst a heuristic
model for deteriorating items with linear trend in
demand for obtaining the replenishment times of
the inventory system whether or not a planning
horizon exists. Giri and Chaudhuri [44] developed
heuristic models, in the lines of Chung and Ting
[33], where the demand rate, deterioration rate and
all the cost components were assumed to vary with
time. Jalan and Chaudhuri [67] and Chakrabarty
et al. [29] presented inventory models for deterio-
rating items with instantaneous supply in inven-
tory. They used a two-parameter and a three-
parameter Weibull distribution to represent the
time to deterioration.
The consideration of exponentially decreasing
demand for deteriorating items was ®rst analyzed
by Hollier and Mak [62] who obtained optimal
replenishment policies under both constant and
variable replenishment intervals. Hariga and Ben-
kherouf [60] generalized Hollier and Mak's [62]
model taking into account both exponentially
growing and declining markets. Wee [120] con-
sidered a deterministic lot size model to derive
optimal service level and replenishment frequency
for deteriorating items where demand declines
exponentially over a ®xed time horizon, scheduling
periods are taken to be of equal lengths and
shortages are allowed except for the initial and
®nal period inventory. Later, Benkherouf [19]
showed that the optimal procedure suggested by
Wee [120] is independent of the demand rate.
Benkherouf and Mahmoud [23] were the ®rst to
propose an inventory model for deteriorating
items with a general increasing time-varying de-
mand pattern. Later, Benkherouf [16] and Ben-
kherouf and Mahmoud [24] developed another
two inventory models for the class of demand
functions D…t† that are decreasing with D…t†=D0 …t†
non-increasing in t and are increasing with
D…t†=D0 …t† non-decreasing in t, respectively. Hariga
[58] developed optimal inventory lot sizing models
for deteriorating items with a general class of in-
creasing and decreasing demand functions which
vary in log-concave fashion with time over a ®nite
planning horizon and under three replenishment
policies viz. DAC (Deb and Chaudhuri [40]),
GMN (Goyal, Morin, Nebebe [52]) and SRP
(Sachan Replenishment Policy [104]). The pro-
posed procedure for each policy is shown to gen-
erate a unique optimal schedule over the ®xed
planning horizon. An extensive empirical com-
parison using randomly generated linear and ex-
ponential demands showed that GMN
replenishment policy is the least cost policy and
the DAC replenishment policy exhibited the best
service level performance.
 S.K. Goyal, B.C. Giri / European Journal of Operational Research 134 (2001) 1±16
Hariga and Al-Alyan's [59] model is concerned
with a lot sizing heuristic for deteriorating items in
growing and declining markets with shortages al-
lowed only in the ®rst …n 1† cycles over a ®nite time
horizon. Giri et al. [45] reconsidered the problem of
Hariga and Al-Alyan [59] to allow shortages in all
cycles following GMN policy. Mandal and Pal [85]
developed an order level inventory system for de-
teriorating items with demand rate a ramp type
function of time. Chang and Dye [31] discussed an
inventory model under GMN policy where the de-
mand rate f …t† is assumed to be a time-continuous
monotonic function with f …t†=f 0 …t† non-decreasing
in t and items are deteriorated at a constant rate with
partial backlogging. They de®ned the backlogging
rate to be 1=…1 ‡ a…ti t††, a decreasing function of
the waiting time for the next replenishment where
a…> 0† and ti being, respectively, the backlogging
factor and the time at which the ith replenishment is
made.
Teng et al. [117] considered four possible re-
plenishment policies for deteriorating items over a
®xed planning horizon where the demand function
is taken to be positive and ¯uctuating with time
which is more general than increasing, decreasing
and log-concave demand patterns. They analyti-
cally identi®ed the best alternative among them on
the basis of the least total relevant costs and also
showed that the relevant cost is a convex function
of the number of replenishments.
Inventory models for deteriorating items have
also been studied by Balki [12], Benkherouf [15±
17], Chakrabarty et al. [30], Giri et al. [46], Hariga
[56,57], Jalan and Chaudhuri [68], and Kim [75].
All these models were developed for an in®nite
replenishment rate. Only a few research articles
have involved ®nite rate of replenishment.
Hollier and Mak [62] obtained replenishment
policies for deteriorating items in an exponentially
declining market under both constant and variable
replenishment intervals. Aggarwal and Bahari-
Kashani [2] extended Hollier and Mak's [62] model
to allow ¯exible rates of production in each period
without shortages. Raafat et al. [101] also derived
an alternative method for ®nding the optimal re-
plenishment schedule in Mak's [84] model which is
concerned with a production inventory with Wei-
bull distribution deterioration and backlogging.
7
Goswami and Chaudhuri [50] proposed two
deterministic inventory models by assuming the
deterioration rate h…t† ˆ at; 0 < a  1; t > 0 and
®nite replenishment rate K ˆ bf …t†; b > 1 and f …t†
being the demand rate at any time t. No inventory
shortage is permitted in the ®rst model while
shortages are allowed and backlogged in the sec-
ond model.
Wee [119] developed an economic production
lot size model for deteriorating items with partial
backordering and obtained the time intervals and
cycle time that minimize the total cost function.
Goyal and Gunasekaran [51] developed an in-
tegrated production inventory marketing model
for determining the economic production quantity
(EPQ) and economic order quantity (EOQ) for
raw materials in a multi-stage production system.
In their paper, they also considered the e€ect of
di€erent marketing policies such as the price per
unit product and the advertisement frequency on
the demand of a perishable product.
Deteriorating inventory models with time-
varying demand and production rates have been
considered by Balkhi and Benkherouf [10,11].
Srinivasan and Lee [115] studied the perishability
problem in production±inventory systems where
the facility is assumed to deteriorate during pro-
duction. Pal and Mandal [98] dealt with an EOQ
model for items deteriorating at some constant
rate with demand changing at a known point of
time and at a random point of time in the ®xed
production cycle. Yan and Cheng [129] determined
the optimal production stopping and restarting
time for an EOQ model where the demand rate,
production rate and deterioration rate all are as-
sumed to be dependent on time. Balki [13] pre-
sented an inventory model for integrated
production system with a single product and
proved the global optimality of the solution to the
proposed model. He considered the production,
demand and deterioration rates for the ®nished
product and the deterioration rates for the raw
materials as the known functions of time.
Bhunia and Maity [25] developed two inventory
models assuming that the replenishment rate is ®-
nite and dependent on the on-hand inventory and
demand simultaneously. The deterioration rate
and the demand rate are assumed to be linearly
8 S.K. Goyal, B.C. Giri / European Journal of Operational Research 134 (2001) 1±16
increasing functions of time. The replenishment
rate R…t† is dependent on the on-hand inventory
level Q…t† and the demand rate D…t† of any time t
such that
R…t† ˆ a bQ…t† ‡ rD…t†;
a > 0; r P 0; 0 6 b < 1
and
h…t† ˆ k ‡ lt; 0 < k; l 6 1; t > 0:
Andijani and Al-Dajani [9] presented an in-
ventory±production system where items deterio-
rate at a constant rate. The inventory problem is
®rst modeled as a linear optimal control problem
taking a general demand function. Linear qua-
dratic regulator (LQR) technique is then applied
to control problem in order to determine the op-
timal production policy. Numerical examples are
solved for three di€erent kinds of demand func-
tions ± constant, linear and quadratic.
Aliyu and Boukas [8] considered discrete-time
models of production±inventory systems with de-
teriorating items. They developed control strate-
gies for both single-item and multi-item systems.
The linear quadratic (LQ) criterion is used to de-
rive the optimal control policies. Since the opera-
tions of the production system are surrounded by
many uncertain parameters and also the deterio-
ration rate of items is taken to be arbitrary, they
developed a robust policy that guaranteed the
stability of the system and an upper limit on the
cost criteria under all possible parameters.
5.3. Stock-dependent demand
It is a common phenomenon observed in the
supermarket that a large pile of goods attracts
more customers. Hence a retailer may display each
of his items in large quantities to generate greater
demand. Then there must arise the problem of
space allocation for each item and investment re-
quirement resulting from the increased inventory
levels. The situation becomes more complex when
the inventory displayed is deteriorating in nature.
This complexity has in¯uenced many marketing
researchers and practitioners to analyze deterio-
rating inventory models with stock-dependent
consumption rate. Inventory models for a single
deteriorating item with stock-dependent demand
rate have been studied extensively in the last de-
cade by Datta and Pal [38], Giri and Chaudhuri
[43], Giri et al. [47], Padmanabhan and Vrat
[90,92], Pal et al. [97], and Sarkar et al. [106].
Padmanabhan and Vrat [92] presented inventory
models for deteriorating items with stock-depen-
dent selling rate and derived the pro®t functions
for both without backlogging and complete
backlogging cases. They assumed the selling rate
as a function of the current inventory level and
rate of deterioration as constant. Recently, Chung
et al. [36] considered the problem of Padmanabhan
and Vrat [92] and derived the necessary and su-
cient conditions of the existence and uniqueness of
the optimal solutions of the pro®t per unit time
functions.
A multi-item inventory with stock-dependent
demand rate was solved by Padmanabhan and
Vrat [91] by a nonlinear goal programming. Roy
and Maity [103] developed multi-item inventory
models of deteriorating items with stock-depen-
dent demand rate in a fuzzy environment. They
assumed the total average cost, warehouse space,
inventory costs, purchasing and selling prices to be
vague and imprecise. Impreciseness of objective
goals and resource constraints have been expressed
by fuzzy membership functions and vagueness in
inventory costs and prices by fuzzy numbers.
5.4. Price-dependent demand
In reality, the retailer's lot size is a€ected by the
demand of the product and the demand is depen-
dent on the price of the product. Therefore, the
problem of determining the retail price and lot size
are inter-dependent. Joint price and lot size de-
termination problems for deteriorating products
were studied by Kim et al. [76] (constant rate of
deterioration) and Wee [122] (varying rate of de-
terioration). Wee [121] also studied the joint pric-
ing and replenishment policy for a deteriorating
inventory with price elastic demand rate that de-
cline over time. He assumed the demand rate
d…s; t† at price s and time t; t P 0 as
 S.K. Goyal, B.C. Giri / European Journal of Operational Research 134 (2001) 1±16
at
d…s; t† ˆ …a bs† e ; 6. Deteriorating inventory with permissible delay in
where a; b; a > 0, s the selling price and the de-
mands during the stock out period are partially
backordered.
Abad [1] considered the dynamic pricing and
lot sizing problem of a perishable good under
partial backlogging of demand. He modeled the
backlogging phenomenon using a new approach in
which customers are considered impatient. When a
stock out situation occurs, only a fraction of de-
mand occuring at a given time is backordered.
And that fraction is a decreasing function of the
waiting time. The approach given is revenue based
and does not require to specify the backorder cost
or lost sale cost which is very dicult to estimate
in reality.
5.5. Deteriorating inventory with stochastic demand
Dave [39] considered a probabilistic schedul-
ing period inventory system for items that dete-
riorate continuously in time and the demand is
assumed to occur instantaneously at the begin-
ning of the scheduling period. He ®rst developed
the model with a non-zero lead time . Then, as a
special case, considered the lead time as a mul-
tiple of the scheduling period. Inventory models
for deteriorating items with stochastic demand
were also developed by Aliyu and Boukas [8],
Pakkala and Achary [93], Shah [113], and Shah
and Shah [114]. Recently, Aggoun et al. [7] and
Benkherouf et al. [21] addressed stochastic jump
inventory models for deteriorating items and
developed optimal control policies for them.
These models belong to the class of piecewise
deterministic Markov processes. Aggoun and his
co-workers [4±6,20] introduced discrete time in-
teger-valued inventory models for perishable
items where each item in stock is assumed to
perish in a given period with some probability.
Aggoun et al. [5] assumed that all perished items
sold are returned by the end of the selling pe-
riod. Based on the number of returned items and
the level of inventory, recursive estimates for the
probability of the number of perished items in
the stock were suggested.
9
payment
In practice, suppliers usually o€er some credit
periods to the retailers in order to stimulate the
demand for the products they produce. They do
not charge any interest on the outstanding
amount if the retailers settle the account with
them within the allowable delay period. This
brings some economic advantage to the retailers
as they may earn some interest from the revenue
realized during the period of permissible delay.
Haley and Higgins [54] introduced the ®rst
model to consider the EOQ under conditions of
permissible delay in payments. Later many re-
searchers examined the e€ect of trade credit on
the optimal inventory replenishment policy under
various practical situations.
Jaggi and Aggarwal [65] developed an inven-
tory model for obtaining the optimal order quan-
tity of deteriorating items in the presence of trade
credit using discounted cash-¯ows (DCF) ap-
proach.
Kim et al. [76] introduced the retailer's price
and lot size problem under the condition of per-
missible delay in payments where retailer's bor-
rowing and lending rates of capital are assumed to
be equal which seems to be quite restrictive from
the practical point of view.
Hwang and Shinn [63] considered the problem
of determining the retailer's optimal price and
lot size simultaneously when the supplier permits
delay in payments for an order of a product
whose demand rate …D† is represented by a
constant price elasticity function of retail price,
viz.
b
D ˆ KP ;
where K…> 0† is the scaling factor, P the
unit retail price 6 Pu , a given upper limit of the
retail price, b…> 0† is the index of the price
elasticity.
They further assumed the retailer's borrowing
rate to be larger than or equal to his lending rate.
Aggarwal and Jaggi [3] developed a model to
determine the optimum order quantity for deteri-
orating items under a permissible delay in
10 S.K. Goyal, B.C. Giri / European Journal of Operational Research 134 (2001) 1±16
payments. Their model does not allow for short-
ages. Jamal et al. [69] generalized the model of
Aggarwal and Jaggi [3] to the case of allowable
shortage. Aggarwal and Jaggi's [3] solution pro-
cedure is improved by Chu et al. [32] by estab-
lishing that the total cost function of Aggarwal
and Jaggi [3] is piecewise convex but not convex in
general.
Recently, Liao et al. [78] developed inventory
models for initial stock-dependent consumption
rate when a delay in payment is permissible under
two di€erent circumstances: (i) the credit period is
less than or equal to the cycle time and (ii) the
credit period is greater than the cycle time for
settling the account.
Shah and Shah [109,110] proposed both deter-
ministic and probabilistic models for exponentially
decaying inventory when delay in payments is
permissible. These models are developed taking
the time as continuous variable. They [114] also
developed a discrete-in-time probabilistic model
assuming the demand …x† as a random variable
which follows a probability density function
f …x=T †; a…T † 6 x 6 b…T †, with
X
b…T †
l…T † ˆ E…x=T † ˆ xf …x=T †;
a…T †
where l…T † is the mean demand during T .
The inventory positions Qx …t†…t ˆ 0; 1; . . . ; T † of
the system at di€erent points of time during the
scheduling period T are described by the following
di€erence equation:
x in demand (except for some luxury goods where
Qx …t ‡ 1† ˆ …1 h†Qx …t† ; the demand increases even when the price in-
…T ‡ 1†
t ˆ 0; 1; . . . ; T :
The boundary condition Qx …0† ˆ S gives the so-
lution of above equation as
x t
Qx …t† ˆ …S ‡ †…1 h†
h…T ‡ 1†
t ˆ 0; 1; . . . ; T ;
where h is the constant rate of deterioration per
unit of time, S the order-level inventory.
They derived the total average expected cost for
two particular forms of the function b…T † ± the
maximum possible demand during the scheduling
period T.
7. Inventory of deteriorating items under a known
price increase
When the price of the commodity being replen-
ished is expected to increase by a ®xed amount from
some future date the basic problem of how much
quantity should be purchased at the present lower
price by placing a special order arises. The purchase
costs and ordering costs are reduced by increasing
the order quantity. This, in turn, increases the in-
ventory carrying costs. The problem becomes more
complex when the items purchased are subject to
deterioration while in inventory. Shah and Shah
[111,112] developed probabilistic and deterministic
time scheduling period models for exponentially
decaying inventory when the price per unit of the
commodity is known to increase by a ®xed amount
and items in the inventory are subjected to deterio-
ration. Shah [113] considered the same problem
with a discrete-in-time probabilistic inventory
model under the conditions of instantaneous deliv-
ery, no shortage and a constant fraction of on-hand
inventory deterioration.
8. Price discount on deteriorating inventory system
Empirical observations in the market place in-
dicate that a price reduction results in an increase
creases). This discount in price motivates the re-
tailers to increase their order quantity and the
retailers in turn o€er a price discount to their
customers to increase demand and pro®t. More-
over, in order to reduce the loss due to deteriora-
x tion a discount pricing policy is frequently
;
h…T ‡ 1† implemented by the suppliers to enhance sales.
This strategy is commonly practiced in supermar-
kets e.g. milk and bread are sold at a discount
price when the expiration date of the items are
near. Wee and Yu [123] considered the e€ects of
the temporary discount sale when the items dete-
riorate exponentially with time.
 S.K. Goyal, B.C. Giri / European Journal of Operational Research 134 (2001) 1±16
9. Deteriorating inventory with in¯ation and time
value of money
The basic assumption in the classical EOQ
model is that all the cost components associated
with the inventory system remain constant over
time. Before 1970, the e€ect of in¯ation was not
considered for analyzing inventory systems per-
haps because of the belief that in¯ation would
not in¯uence the inventory policy to any signi®-
cant degree. However, the situation changed
radically in the 1970s when the actual in¯ation
rate in most of the Western countries shot up to
be in the range 8±20% and as a matter of fact the
usual EOQ solution required necessary modi®ca-
tions. The ®rst attempt in this direction was by
Buzacott [28]. After that several researchers have
extended his approach to various interesting sit-
uations.
Bose et al. [27] and Hariga [55] developed two
inventory models incorporating the e€ects of in-
¯ation and time value of money in their models
with constant rate of deterioration (exponential
decay) and time proportional demand. A heuristic
model was presented by Chung et al. [35].
Su et al. [116] studied an inventory model under
in¯ation for stock-dependent consumption rate
and exponential decay. They assumed that the
consumption rate is a function of the order
quantity.
Wee and Law [125] employed the concept of
in¯ation and time value of money into the model
where demand is price-dependent and shortage is
allowed. The model considered a production en-
vironment with a ®nite replenishment rate. An
optimization framework is presented to derive
optimal production and pricing policies when the
total net present value is maximized.
Recently, Sarker et al. [105] determined an op-
timal ordering policy for deteriorating items in a
supply chain system under in¯ation and time value
of money, permissible delay in payment and al-
lowable shortage. They studied the e€ects of in-
¯ation and and time value of money under given
sets of in¯ation and discount rates and concluded
that the optimal order quantity and maximum
allowable shortage vary with the di€erence be-
tween in¯ation and time discount.
11
10. Deteriorating inventory with two warehouses
Traditional inventory models are developed
mainly for a single warehouse. In practice, due to
limited capacity of showroom facility in own
warehouse (OW), an additional storage space
known as rented warehouse (RW) is often required
by the business organizations. Since these ware-
houses need not have the same preservation facil-
ity and environment conditions, it is quite
appropriate to assume di€erent holding costs for
di€erent warehouses. Again, since the deteriora-
tion depends on preserving facility available in a
warehouse, hence the di€erent warehouses may
have di€erent deterioration rates. Thus it becomes
a common problem of deciding how much to keep
excess stock in RW so that the total cost of the
system is minimized. Two warehouse inventory
models have been considered by Pakkala and
Achary [93±95], Ishii and Nose [64], Benkherouf
[18], and Bhunia and Maity [26].
Pakkala and Achary [93,94] developed both
deterministic and probabilistic two-warehouse in-
ventory models for deteriorating items with ®nite
replenishment rate and shortages. These models
assumed time as a continuous variable. Pakkala
and Achary [95] also proposed a discrete-in-time
model for deteriorating items with two levels of
storage facility.
Ishii and Nose [64] investigated the optimal
ordering policies for a perishable product with two
types of customers ± high priority ones (who are
sensitive to freshness of the products) and low
priority ones (who are not so sensitive to freshness
of the products), di€erent selling prices and the
capacity constraint of OW. The demands in suc-
cessive periods are assumed to be independent
non-negative random variables with known dis-
tribution functions and high and low priority de-
mands are taken to be independent. The stock is
assumed to be depleted by high priority demand
®rst and then low priority demand using FIFO
issuing policy.
Sarma [107] developed a model for a single
deteriorating item where both the demand rate and
deterioration rate are assumed to be constant over
a ®xed scheduling time and OW is used to its full
capacity. Benkherouf [18] relaxed the assumptions
12 S.K. Goyal, B.C. Giri / European Journal of Operational Research 134 (2001) 1±16
of ®xed cycle length and known quantity to be
stocked in OW and obtained the optimal schedule
that minimizes the total cost per unit time in a
cycle for an arbitrary demand function where cy-
cles are assumed to form a regenerative process.
Recently, Bhunia and Maity [26] analyzed de-
terministic inventory models allowing di€erent
levels of item deterioration in both warehouses.
11. Conclusion
In this paper we have provided an up-to-date
review of deteriorating inventory literature after
Raafat's [100] survey. Previously Nahmias [88]
made notable contributions to the analysis of both
®xed life perishable inventory and inventory sub-
ject to continuous exponential decay. His article
would serve as a basis to trace some of the re-
ported literature on this topic up to this time.
Later, Raafat [100] provided a comprehensive
survey on continuously deteriorating inventory
models where the deterioration was considered as
function of the on-hand level of inventory. In the
present article, the available relevant models have
been classi®ed and quanti®ed into a number of
categories and their principal features have been
discussed in brief to bring out more pertinent in-
formation regarding model developments in the
last decade.
Deteriorating inventory models have so far
been developed and analyzed extensively either
from deterministic approach or from stochastic
approach. In deterministic approach, the parame-
ters are assumed to be known; the objective is
formulated under ®xed constraints. In real world
inventory of deteriorating items, the information
available is not always well de®ned or precise; it is
rather vague, imprecise or insucient. Conse-
quently mathematical modeling of such an inven-
tory system with speci®c precision is not always
straightforward. In this regard the probability
theory has done a good job in making decisions
under the conditions of risk and uncertainty. The
imprecisions or uncertainties can also be inter-
preted eciently, in some cases, through fuzzy set
concepts [130].
Acknowledgements
The authors would like to thank the anony-
mous referees for their valuable comments and
suggestions which helped immensely in producing
the revised version of this article.
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