International J ournal of Engineering Sciences, 2(2) February 2013, Pages: 28-33

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* Corresponding author.
Email address: ritha_prakash@yahoo.co.in

EOQ Model for Small Scale Retailers with Local Advertisements
W. Ritha
1
, Nivetha Martin
2

1,2
Department of Mathematics, Holy Cross College (Autonomous), Tiruchirappalli - 620002, India.

A R T I C L E I NF O A B ST R A CT
Keywords:
Inventory
Advertising
Technology
Social effect

Today, we live in the world of technology. The progression of technology has brought about
notable changes in all the fields including that of commerce. The field of commerce has been
transformed by the application of modern techniques. The conception of inventory is associated
with trade. The motive behind the formulation of inventory model is to obtain the optimal order
quantity. The influence of many factors like learning and forgetting on the Economic Order
Quantity model signifies that the optimal quantity is subjected to manipulation.
In this paper we develop an inventory model for determining the effect of progress of technology
on the society with orientation to Economic Order Quantity. A distinguishing feature of the model
is that the cost of advertising and the social effects of advertising are included. This paper also
investigates the attributing factors of the social impacts which could be minimized to build a
healthy society.

2013 Int. j. eng. sci. All rights reserved for TI Journals.


1. Introduction

In the present day, nations compete with one another to attain the pinnacle of accomplishment. The grounds for achieving the above
objectives are possessing and processing of assets in a precise manner. The wherewithal of the nation is channelized to the utilization of the
populace. To make the utility effective, planning and execution must be carried out systematically. This paved way for the emergence of
industries, companies, factories and so on, which lead the people to step into the field of commerce. The focus on trade, comprises of two
major constituents, one is the consumer and the other the supplier. They are the partners of business life. The intimacy between them must
be sustained by enabling the transactions to run smoothly. The challenging task for the suppliers is to win over the consumers by
maintaining their standard amidst its competitors.

In this world of transformation the suppliers evolve with novelty and employ different modern techniques in their systemof production.
These are the consequences of advancing technology. The existing market structure in the world economy is oligopoly, which is
characterized by indefinite number of buyers with limited number of sellers. The sellers are interdependent, as the changes made by one
reflects remarkable changes in the entire market.

The customers have wide open choice in selecting their enviable supplier. To retain the consumers the vendor handles various tactics such
as discount offer, concession in cost, reduction of price and so on. To make these offers fortunate, it has to be communicated to the
customers at the right time in the right manner. One such means is Advertising, which is becoming more important every day in this
technological era. The objective of the advertisement is to create awareness, enrich the knowledge, and kindle the likings of the customer.
The advantage of advertising techniques used to promote commercial goods and services can be used to inform, educate and motivate the
public about the new venture. The marketing mix has been the key concept to advertising. It represents the actual product, its value
promotes its marketing, stimulates the customers to afford.

This paper is organized as follows. Section 2 elucidates the literary review of Advertising. Section 3 describes the modes of advertising and
its advantages in brief. Section 4 deals with the formulation of the EOQ model. Section 5 explains the ill effects of advertising to the
society. Section6 concludes the proposed work.


2. Literature Review

Economic lot size models have been studied extensively since Harris [6] presented the famous EOQ formula in 1913. Five years later, the
economic production quantity (EPQ) inventory model was proposed by Taft (1996) [25]. Both models have been extensively used by
industries and enterprises in the management of their inventories. Roach (1999) [19] presents an original and interesting historical
discussion on the likely derivation of Harriss EOQ model.
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29
The ultimate aimof industries is to gain profit amidst this competitive scenario; so they focus on the aspect of advertisement which is their
hope of building and sustaining the brand name of the product. In general the advertising cost is shared both by the manufacturer and the
retailer based on their agreement terms.

The concept of co-op advertising was developed by Berger (1972) [2], which highlighted that mathematical modeling could yield improved
managerial decisions and better performance for the whole channel. Bergers model was then extended by researchers in a variety of ways
under different co-op advertising settings. Crimmins (1985) remarked that the co-op advertising is in essence the financial arrangements
between two firms, which specify how two firms share the costs caused by the promotion measures. Roslow, Laskey, and Nicholls (1993)
[21] studied co-op advertising in the supply chain and demonstrated that cooperation in advertising investment could increase the profit of
the whole supply chain. Khouja and Robbins (2003) [11] investigated the optimal expense of the local advertising and the ordering quantity
under the newsboy framework.

However, most of the above literature on co-op advertising considered the co-op advertising policies. Huang, Li (2002), Zhu, and Chau
(2002) developed independently a cooperative advertising model for a one-manufacturerone-retailer supply chain. Few researchers
considered the market structure in which the retailers power is equal to or even more than that of the manufacturer. Huang and Li (2001)
[10] further discussed the cooperative advertising issue for the supply chain with one manufacturer and one retailer. Xie and Ai (2006) [31]
extended the models developed by Huang and Li (2001) [10] and Li et al. (2002) [14] to the case, where the manufacturers marginal profit
is relatively small. Yue, Austin, Wang, and Huang (2006), Szmerekovsky and Zhang (2009) [24] further extended the work of Huang et al.
(2002) and Huang and Li (2001) [10] in developing a price discount model to coordinate the advertising expenses of the two parties. A
generalization of the earlier works on cooperative advertising by Hempelmann (2006) [8] covered the situation where two parties have
asymmetric information on the marginal cost of sales. Later an optimal cooperative advertising integration strategy for organizations having
a direct online channel was developed. Sheng.et.al (2011) [22] developed the cooperative advertising model that involves one-manufacturer
and two-retailers.


3. Advertising

Advertising ,a one way communication about a product or organizationthat is paid by a marketer to persuade an audience (readers, listeners
and viewers) to a commercial offering to take some action with respect to products, ideas, or services. It is a powerful educational tool
capable of reaching and motivating the customers and drives consumer behavior for commercial purpose.

Virtually any mediumcan be used for advertising. Commercial advertising media can include wall paintings, billboards, street furniture
components, printed flyers and rack cards, magazines, newspapers, radio, cinema ,television, web banners, mobile telephone, web
popups.The mode of advertisement tracks the way for classification of advertisement.

One among the modes of advertising is billboards, which are large structures located in public places which display advertisements to
passing pedestrians and motorists (Cai., 2003) [4]. Most often, they are located on main roads with a large amount of passing motor and
pedestrian traffic, however, they are also placed in any location with large number of viewers, such as on mass transit vehicles and in
stations, in shopping malls or office buildings, and in stadiums.

Distribution of handbills is also one of the mediums of advertising. The bills are issued to the people for themto get to know the motive of
advertisement. One of the mediums preferred for advertising in recent days is television, which succeeded radio advertising. It has three
main advantages (Ramalingam., 2006) [17]

1. It manipulates the taste of consumers.
2. It reaches a large audience simultaneously.
3. The audio and video effects generate sturdy impact.

In addition to these mediums of advertising, the first banner advertisement was introduced in 1994, and as a result of it, a new realmof
advertising emerged (Ritu., 2007) [18]. It was then that the idea that the Internet could be used as a marketing communication tool became
a reality. In the tenyears since, the Internet advertising industry has exploded. Onlineadvertising is a formof promotion that also uses the
Internet and World Wide Web for the expressed purpose of delivering marketing messages to attract customers (Yongma.,2011) [33].
Email marketing is a formof direct marketing which uses electronic mail as a means of communicating commercial or fund-raising
messages to an audience. In its broadest sense, every email sent to a potential or current customer could be considered email marketing.
Opt-Email advertising or permission marketing, is a method of advertising via email whereby the recipient of the advertisement has
consented to receive it. This method is adopted by several marketers to eliminate the disadvantages of email marketing. Thus there is a
progressive growth in the field of advertisement which ranges frombillboards to opt-in email advertising. In 2010, spending on advertising
was estimated at more than $500 billion worldwide. This gives a vivid picture of the significance of advertisement. In this technological
world, the field of advertisement has emerged as a boon both for the suppliers and consumers.


4. Notations and Assumptions

The following notations and assumptions are used throughout to develop the EOQ model.


W. Ritha and Nivetha Martin
Int ernati onal Journal of Engi neeri ng Sci ences, 2(2) February 2013


30
4.1. Notations

monetary units (mu) (e.g.,,$ )
A order cost (mu)
c unit purchase cost (mu/ unit)
h holding cost (mu/ unit/year )
I initialisation cost
fixed cost per advertisement
variable cost per advertisement
n number of times the advertisement is telecast
t cost of telecasting the advertisement once (mu)
f
1
fixed cost of producing a handbill.
v
1
variable cost of producing a handbill.
N number of employees involved indistribution of handbills
B number of lots containing equal quantity of handbills
z cost per employee .
d distance to be travelled (in km)
a
1
fixed cost per trip(mu)
b
1
variable cost per trip(mu)


4.2. Assumption

The initialisation cost of casting an advertisement is the amount of money spent by the retailer to get in connection with the advertising
agency, which is assumed to be constant irrespective of the medium.


4.3. Model Development

So far the models were created on the basis of the cooperative advertising policy of manufacturer and retailer. The cost of advertising was
shared between them, but this is not the case always. In certain situations the vendor obtains the commodities from the manufacturer and
sells it to the customers independently. Generally the seller scatters his interest in maximizing the profit and in minimizing the cost of
ordering, purchasing and holding. The seller can expand his business circle by increasing the number of local customers; with this motive
the seller looks for advertising. The cost of advertising must be minimum, but at the same time it must be effective. In order to make the
customers get know the attributes of the products under sales, the seller looks for uncomplicated advertising tools. It is very transparent that
advertising assists in increasing the demand of the products.

Now consider a situation where the retailer acquires products fromwell established firm. He has to sell the purchased products within the
local regions, so he has decided to use various strategies, like price discount, exchange offer and so on. He cannot informeach person (i.e.
his customers) about his offers. Instead he looks for the help of advertising agencies. As there are a number of modes of advertising, the
retailer must carefully select the effective and economical advertising tool, which communicates the appropriate information about the
product to the people. These are the aspects to be kept in mind at times of advertising. In this case the cost of advertising is borne only by
the retailer. The ultimate motive of advertising is that, the advertisement must reach people. Before advertising, the retailer must study the
people around the business environment, in terms of their nature, interests, culture and so on. The retailer cannot advertise via handbills to
the people who are illiterate, but can advertise via radio or television. So the selection of the advertising medium is significant. Let us
consider the case where the retailer chooses handbills and television as the mode of advertising.

The optimal quantity is determined for three different cases.

Case (i)
Consider the circumstance, where the retailer wishes to advertise via television. In these days a number of channels are telecasted. Some
belong to the government sector, the rest falls under private category. The motive o advertising is to familiarise the product to the
customers. Nowadays the retailers use the tactic of market segmentation. A market segment consists of a large identifiable group within a
market with similar wants, purchasing power, geographical location, buying attitudes. Thus the retailers telecast advertisements according
to their desirable taste to make the product reach the customers. Let us consider the case where the retailer wishes to advertise via local
channels.

EOQ cost per cycle

D
hQ
cQ A Q C
2
) (
2


Advertising cost per cycle

nt I Q A ) (
EOQ Model For Small Scale Retailers with Local Advertisements
Internat i onal Journal of Engi neeri ng Sci ences, 2(2) February 2013



31
The total cost per unit time is

T
Q A Q C
Q
) ( ) (
) (

, where
D
Q
T

Q
D nt I hQ
cD
Q
AD
Q
) (
2
) (





The optimal solution is given as

h
nt I A D
Q
) ( 2

Case (ii)
The other mediumof advertising is to distribute hand bills to the people. Consider the situation where the retailer decides to advertise via
handbills. He himself cannot distribute all the bills, so he hires some persons to carry out the work of distributing the handbills to the local
regions.

EOQ cost per cycle

D
hQ
cQ A Q C
2
) (
2


Advertising cost per cycle

nz v f I Q A
l l
) (

T
Q A Q C
Q
) ( ) (
) (

, where
D
Q
T

Q
D nz v f I hQ
cD
Q
AD
Q
l l
) (
2
) (



The optimal solution

h
nz v f I A D
Q
l l
) ( 2



Case (iii)

In this case handbills are used as the mediumof advertising but, the handbills are distributed to distant areas within the local regions.

EOQ cost per cycle
D
hQ
cQ A Q C
2
) (
2


Advertising cost per cycle

db a nz v f I Q A
l l
) (

T
Q A Q C
Q
) ( ) (
) (

, where
D
Q
T
W. Ritha and Nivetha Martin
Int ernati onal Journal of Engi neeri ng Sci ences, 2(2) February 2013


32

Q
D db a nz v f I hQ
cD
Q
AD
Q
l l
) (
2
) (



The optimal solution

h
db a nz v f I A D
Q
l l
) ( 2



5. Social problems of Advertising

While advertising can be seen as necessary for economic growth, it is not free fromdemerits. The strong objectionand arguments against
advertisement arise in the minds of the people, which economists and experts supports with valid reasons. It is generally criticized that the
cost of advertisement is higher than the selling price of the advertising goods. They feel that it is an additional expense, but in this modern
era of high competition Advertising informs the buyers about the ability of a certain product or service in the market and encourages them
to buy it .Some feel that advertisement influences the mind of the public to be desired, to taste the products by the consumers with the
objective of increasing sales but the advertisers argue that it is not fantasy, rather it is to make it deliberate. The owners of small firms are
displeased as they cannot afford equivalent amount of money as the larger firms do. The advertisement highlights the positive aspects of the
products which are homogeneous in nature. This leads the people to the state of confusion of choice, on the other hand advertising results in
monopoly that makes the consumer become slaves to a particular brand. These are the negative impacts of advertising on the consumers,
but have been overcome by the management techniques on the grounds of the consultancy of the experts.

On other hand, advertising hinders the society to a certain extent. Let us discuss the social effects of employing the two mediums of
advertising namely advertising through handbills and television.

The use of handbills disintegrates the cleanliness of the surrounding area, which makes the road sides look dirty. Thus, it reduces the
natural beauty by invading public spaces. This is a formof exploitation. Also distribution of handbills comes under the kind of roadside
advertisement. Roadside advertisements are common visual external distractions from driving (Brumec et al., 2010) [3]. External
distractions are influenced by those situations in which the drivers attentionis captured by an event, object, person or activity irrelevant to
driving and outside the vehicle (Alberto., 2011) [1] . Thus this mode of advertising causes trouble to the people while driving.

Advertising through the television cause hurdles to the social and cultural set up. It has been examined that recent advertising does not
possess the ethical values. The advertisements are developed with the only intention of attracting the viewers without taking into the
considerations its ill effects caused to the community. Sometimes the display of the advertisement causes mental agitation to the audience
that even leads to the dislike of purchasing the product (Ramakrishna., 2006). This is the basis of the social effect, which results from
advertising through television.


6. Conclusion

This paper presents a general outlook of advertising which comprises of its merits and demerits. An economic order quantity model that
includes the cost of advertising is also presented. The effect of two mediums of advertising are described in brief. As advertising motive is
economic growth, it cannot be ignored and neglected, but at the same time its outcome to the society can be minimized. This paper
concludes that the advertisement must be cast without bringing hurdles to the uplift of the society; and also without harmto the feelings,
emotions and culture of the community.


Acknowledgement

This Research is supported by University Grand Commission ( UGC ) under Major research project 39-50/ 2010 ( SR )


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