Economic Order Quantity Approach for Perishable Inventory

Abstract

The paper focuses on the applicability of Economic order quantity (EDOQ) model in perishable inventory systems, which are characterised by spoilage, decreased quality and demand that are time sensitive. Although the classical EOQ model presupposes a steady demand, non-perishable goods, these conditions are restrictive in terms of the industry that handles food, pharmaceuticals and other short-life products. The paper critically examines the recent advancements in the models of EOQ, which have deterioration, stochastic demand, and spoilage costs application and the main gaps in the literature and practice regarding the application of these models. Based on this review, this paper will give a proposed extended form of the EOQ formulation to introduce a clear combination of deterioration rates, spoilage costs and time dependent demand in to the total cost structure.

The quantitative analytical methodology is assumed and a combination of the mathematical modelling and sensitivity analysis are used to test the impact of the perishability parameters on the optimal order quantities and total cost of inventory. The model behaviour is demonstrated in artificial data situations with varying rates of decay, demand patterns etc. The results show that as perishability increases, optimal order quantities decrease greatly and the cost dominance shifts to costs of spoilage as opposed to holding costs. Findings also indicate that smaller and frequent replenishment cycles are more cost effective to products that are highly perishable. The paper notes that conventional EOQ policies can result in the making of non-optimal decisions and wastage especially when it involves perishable products.