An Economic Order Quantity Model for New Products When Demand Follows Dynamic Innovation Process

An Economic Order Quantity Model for New Products When Demand Follows Dynamic Innovation Process

K. K. Aggarwal (University of Delhi, India) and Alok Kumar (University of Delhi, India)
DOI: 10.4018/978-1-4666-5958-2.ch015
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In this era of globalization and constant innovation, the life cycles of products are diminishing, which tends to cause dynamic behaviour in the system, and because of this, there is a constant introduction of new products in the market. Therefore, while developing inventory models for new products, it becomes necessary to consider dynamic parameters associated with the demand function and responsible for making the system dynamic, which are essential for economic ordering policies for such products. In this chapter, an economic order quantity model is developed in which the demand is time-dependent and innovation-driven. The parameters such as coefficient of innovation and potential market size associated with the demand function are considered dynamic over time to match the real feature of the system. The model is illustrated with a numerical example, and a comprehensive sensitivity analysis of the optimal solution with respect to different parameters is performed to know the utility of the model.
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2. Literature Review

The innovation diffusion theory has been extensively used in the marketing literature, which is a well-known theory for the diffusion of new products. Therefore, while developing economic order quantity models for new products the incorporation of innovation diffusion theory is necessary. Innovation-Diffusion theory can be useful process to assist inventory manager for planning and making strategy to determine and control the stock levels within the physical distribution function to balance the need for product availability and at the same time minimizing the stock holding and handling costs.

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