Production lot size model: Various optimizing criteria, continuous discount pricing and marketing policies

This research study considers the interaction of a finite replenishment rate production lot size inventory model and differential pricing conditions. An attempt is made to develop a method for arriving at a production lot size formula, which takes into account the effects of varying marketing conditions on demand and the possibility of defective items in the production process. Additionally, based upon the previous studies, the proposed paper will be extended by introducing different model formulations to deal with the issue of defective items. A profit maximization approach has been utilized in order to determine the optimal value of production lot size. As indicated in the literature, the major drawback of profit maximization as a performance measure is that it is not related to the size of the investment needed to generate the said profit. For the investment centers, an approach that relates the magnitude of the profits earned to the corresponding capital requirements is a more appropriate measure of performance. To resolve this issue, many authors suggested two additional objectives, namely, maximization of return on investment (ROI) and maximization of residual income (RI). This study also incorporate these objectives in order to determine the optimal production lot size. Finally, the derived models are optimized under the continuous discount pricing approaches for two well known cases: hyperbolic-decreasing and linear-decreasing. A numerical example is provided to illustrate the results derived.