AN INVENTORY MODEL ESTABLISHING ECONOMIC SUSTAINABILITY FOR DEVELOPING EFFICIENT MARKDOWN POLICIES WITH PRODUCT DETERIORATION CONSIDERATIONS

Abstract

This study develops a sustainable deteriorating inventory model incorporating multi-variable demand, time-dependent holding cost, inflation, and an optimal markdown policy to maximize annual profit. In modern retail systems, deterioration of products and inflation significantly affect inventory decisions, requiring dynamic pricing and cost-sensitive strategies. The proposed model assumes that demand is a joint function of selling price and on-hand inventory, making it more realistic than constant-demand models. Holding cost is taken as a time-varying function to reflect real operational conditions, while deterioration is also considered to be time-dependent with salvage value for deteriorated items. A single markdown is introduced during the selling cycle to stimulate demand and reduce leftover stock. The analytical framework formulates production, holding, deterioration, and sales revenue costs to derive the annual profit function. Optimal cycle time and markdown timing are obtained using second-order optimality conditions. A numerical example illustrates the applicability of the model, and results show that properly timed markdown policies significantly improve profitability while reducing excess inventory. Sensitivity analysis is conducted to examine the impact of key parameters such as holding cost, deterioration rate, production cost, markdown rate, and inflation. Results reveal that lower holding and deterioration costs enhance profit, while inflation and higher production costs negatively affect system performance. The findings confirm that an efficient markdown policy plays a crucial role in managing deteriorating inventories under inflationary conditions. The model provides valuable decision-making support for retailers dealing with perishable goods. Extensions of this work may include partial backordering, stochastic demand, and trade credit policies.