Abstract: The demand of items in the supermarket mode of sales terminals is largely dependent on its inventory level because of the “selection effect” and  “advertising effect” of items-demonstrated inventory. It is assumed that retailer sells deteriorating items in supermarkets, and the demand of items linear depends on the current stock levels. When the inventory level in the supermarkets drops to a certain amount, the items should be transported immediately from distribution center to supermarkets to supplement its inventory. An inventorydistribution model is developed based on the goal of maximum average profit, the existence and uniqueness of the optimal solution to the present model are examined by optimization theory, and an algorithm is also shown to find the global optimal inventory and distribution policies of the considered problem. Finally, numerical examples are given and a sensitive analysis made to illustrate the effect of parameters on the system's optimal strategy and profits.

Key words:  inventory, deteriorating items, inventory-level-dependent demand, distribution