Inventory model with stochastic lead-time and price dependent demand incorporating advance payment

Abstract

Inventory model for an item is developed in stochastic environment with price-dependent demand over a finite time horizon. Here, probabilistic lead-time is considered and shortages are allowed (if occurs). In any business, placement of an order is normally connected with the advance payment (AP). Again, depending upon the amount of AP, unit price is quoted, i.e., price discount is allowed. Till now, this realistic factor is overlooked by the researchers. In this model, unit price is inversely related with the AP amount. Against this financial benefit, the management has to incur an expenditure paying interest against AP. Taking these into account, mathematical expression is derived for the expected average profit of the system. A closed form solution to maximize the expected average profit is obtained when demand is constant. In other cases model is solved using generalized reduced gradient (GRG) technique and stochastic search genetic algorithm (GA). Moreover, results of the models without and with advance payment are presented and solved. The numerical examples are presented to illustrate the model and the results for two models obtained from two methods are compared in different cases. Also, some parametric studies and sensitivity analyses have been carried out to illustrate the behavior of the proposed model. It is observed that advance payment has positive effect on the system.