Optimal substitution strategies for inventory management: a novel simplified EOQ based model with shortages

This research article presents an enhanced Economic Order Quantity (EOQ) type inventory model of two products with demand substitution. The model is designed for scenarios involving two substitute products characterized by distinct demand rates but identical cost structures considering shortages. This model accounts for deterministic and constant demand rates and operates under an independent replenishment policy. In the existing literature, the most of the researcher conclude that full substitution can never be optimal and derived conditions for the optimality of either no or partial substitution. This study determines the policy that leads to new insights that full substitution can be also optimal. Moreover, if partial substitution is optimal, it is always one-way substitution. To demonstrate the effectiveness of proposed model, a numerical experiment which has carried out, the result shows that when partial substitution, no substitution, and full substitution may be optimal. Furthermore, the sensitivity analysis has been conducted by varying as much as parameter individually to assess its impact on the optimal policy.