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Production inventory policy under a discounted cash flow

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This paper presents an extended production inventory model in which the production rate at any instant depends on the demand and the inventory level. The effects of the time value of money are incorporated into the model. The demand rate is a linear function of time for the scheduling period. The proposed model can assist managers in economically controlling production systems under the condition of considering a discounted cash flow. | Yugoslav Journal of Operations Research 15 (2005), Number 2, 289-300 PRODUCTION INVENTORY POLICY UNDER A DISCOUNTED CASH FLOW Chao-Ton SU Department of Industrial Engineering and Engineering Management National Tsing Hwa University, Taiwan Cheng-Wang LIN Department of Industrial Engineering and Management National Chiao Tung University, Taiwan Received: October 2002 / Accepted: August 2004 Abstract: This paper presents an extended production inventory model in which the production rate at any instant depends on the demand and the inventory level. The effects of the time value of money are incorporated into the model. The demand rate is a linear function of time for the scheduling period. The proposed model can assist managers in economically controlling production systems under the condition of considering a discounted cash flow. A simple algorithm computing the optimal production-scheduling period is developed. Several particular cases of the model are briefly discussed. Through numerical example, sensitive analyses are carried out to examine the effect of the parameters. Results show that the discount rate parameter and the inventory holding cost have a significant impact on the proposed model. Keywords: EMQ, discounted cash flow, optimal production scheduling. 1. INTRODUCTION The standard Economic Manufacturing Quantity (EMQ) model assumes a constant and known demand rate over an infinite planning horizon. Mak [16] proposed a production lot size inventory model with a uniform demand rate over a fixed time horizon. However, most items experience a variable demand; they are varied with time. Numerous research efforts have been undertaken to extend the basic EMQ model by relaxing various assumptions so that the model conforms more closely to a real world situation. Bhunia and Maiti [2] and Goswami and Chaudhuri [9][10] relaxed the 290 C.-T. Su, C.-W. Lin / Production Inventory Policy Under a Discounted Cash Flow assumption of a constant demand. They .