An optimal inventory policy for subsequent price reduction problem

Abstract

This article considers an optimal inventory policy of the retailer in response to a special price strategy on subsequent orders by the supplier. A finite horizon model with constant yearly demand is considered in this article. The closed form solution for optimal order quantities and an optimal number of orders is obtained by minimizing the total cost. Numerical and sensitivity analysis are carried out to support the theoretical results. A significant percentage difference in cost between the developed optimal policy and the EOQ policy highlights the importance of the developed optimal policy.