Inventory Policies Under Various Optimizing Criteria and Variable Markup Rates

This paper extends the deterministic EOQ model to reflect various optimizing criteria and alternative demand and price structures. Its primary purpose is to develop decision rules for the management of finished goods inventories, especially in retailing, where inventories are evaluated in the same way as any other investment, namely on their ability to generate profits, rather than on the traditional least-cost basis. To that effect, the models developed here consider demand to be a function of price, with price defined as a markup of unit cost. The decision variables are the order quantity and the markup rate. Possible optimizing objectives include profits, return on investment, or residual income, the three most widely used evaluators of short-term investment performance. Optimal solutions for each case are obtained and the resulting inventory policies evaluated.