Profitability Index Maximization in an Inventory Model with a Price- and Stock-Dependent Demand Rate in a Power-Form

Valentín Pando, Luis A. San-José, Joaquín Sicilia and David Alcaide-López- de-Pablo
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Valentín Pando: Department of Statistics and Operations Research, University of Valladolid, 47002 Valladolid, Spain
Luis A. San-José: IMUVA-Mathematics Research Institute, University of Valladolid, 47002 Valladolid, Spain
Joaquín Sicilia: Department of Mathematics, Statistics and Operations Research, University of La Laguna, 38200 San Cristóbal de La Laguna, Spain
David Alcaide-López- de-Pablo: Department of Mathematics, Statistics and Operations Research, University of La Laguna, 38200 San Cristóbal de La Laguna, Spain

Mathematics, 2021, vol. 9, issue 10, 1-29

Abstract: This paper presents the optimal policy for an inventory model where the demand rate potentially depends on both selling price and stock level. The goal is the maximization of the profitability index, defined as the ratio income/expense. A numerical algorithm is proposed to calculate the optimal selling price. The optimal values for the depletion time, the cycle time, the maximum profitability index, and the lot size are evaluated from the selling price. The solution shows that the inventory must be replenished when the stock is depleted, i.e., the depletion time is always equal to the cycle time. The optimal policy is obtained with a suitable balance between ordering cost and holding cost. A condition that ensures the profitability of the financial investment in the inventory is established from the initial parameters. Profitability thresholds for several parameters, including the scale and the non-centrality parameters, keeping all the others fixed, are evaluated. The model with an isoelastic price-dependent demand is solved as a particular case. In this last model, all the optimal values are given in a closed form, and a sensitivity analysis is performed for several parameters, including the scale parameter. The results are illustrated with numerical examples.

Keywords: inventory models; price- and stock-dependent demand; profitability index maximization; isoelastic price-dependent demand (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2021
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