Abstract—Research on procurement-production systems for deteriorating items has been done. The majority of studies assume that the perishable characteristics affect only the quantity of inventoried items. For food products, however, their quantity remains constant during their shelf life period, but the quality deteriorates over time. This paper proposes a new procurement-production model incorporating this situation. The quality change behavior of food products is approached differently depending on their forms either as raw materials or finished goods. As raw materials, the kinetic model is used to represent the quality degradation during storage time, while as finished goods the shelf-life dependent pricing is utilized to describe the value loss due to the quality perception of customers. A mathematical model representing the integrated procurement-production of raw materials and finished goods at a manufacturer is established in this research. The objective is to maximize the total profit per unit time of the system by controlling a number of variables, namely the production cycle (T), the number of raw materials’ procurement over one production cycle (m) and the number of finished goods delivery over one production cycle (n). Index Terms—Deteriorating items, food inventory, procurement-production system, quality loss, value loss. I. INTRODUCTION Ever since EOQ (Economic of Quantity) inventory control has been introduced, many researchers still develop it to solve various inventory problems. Conventionally, economic lot-size of raw materials was decided separately from finished product and this may lead to sub-optimization. It is because demand for raw materials depends on production schedule of finished products. Later, Goyal [1] developed an integrated inventory model for raw material and finished product. This research gave the first contribution in the field of integrated procurement-production (IPP) systems. Recently, research in the field of IPP system receives significant attention from scholars and many inventory models has been developed to accommodate this issue [2]. Goyal and Deshmukh [3] developed a model for IPP systems in just in time JIT environment to minimize set up time. And later, Lee [4] extend the IPP to an integrated supply chain problem by integrating the economic lot size of raw material, manufacturing set up and finished products. However, those studies assume that items can be stored infinitely, while in Manuscript received November 5, 2012; revised January 10, 2013. Gusti Fauza is with the School of Engineering, University of South Australia and Food Science and Technology Department, Sebelas Maret University, Indonesia (email: faugy001@mymail.unisa.edu.au). Yousef Amer and Sang Heon Lee are with the School of Engineering, University of South Australia. fact, some items have limited life time. In reality, it is often found that some particular items deteriorate over the storage period, for instance food products. For such items, the quality degradation during the storage time can lead to a significant waste or loss. To illustrate, an FAO study reported that every year 1.3 billion tones food are wasted globally [5]. The major food losses occur in producer-retailer stage and the mismatch between production and demand is identified as the main cause. Noting this situation, it is crucial to incorporate the perishability characteristics of the items while managing the inventory. Actually, studies on integrated inventory models for perishable items have been done [6]-[8]. However, those models assume that the deterioration of the items leads to the quantity decrease, as observed in the inventory of gasoline, alcohol or radioactive materials. Certainly, these assumptions are not suitable for food products. The quantity of food typically remains the same during their shelf-life, while their quality, which can be represented by the freshness, obviously degrades. In addition, it is also assumed in the previous models that the deterioration characteristics of the raw materials and the finished goods are identical. But food is a dynamic item [9]. The perishable characteristics of food are not identical and need to be approached differently. Therefore, the existing models are inadequate for representing the inventory systems of food products. This paper proposes a new model of food inventory in the IPP system incorporating quality loss during storage time. Unlike the previous research in this field, the proposed model approaches deteriorating characteristics for raw materials and finished goods in different ways. The remaining sections of this paper are organized as follows: Section 2 contains a review of existing inventory models for perishable items, while Section 3 discusses the modeling of quality degradation of raw materials. Moreover, Section 4 presents model for the quality of finished goods, or called value loss model. The complete model of an integrated procurement-production system for food products is covered in Section 5, while the last section, Section 6, summarizes this paper. II. LITERATURE REVIEW In this literature review, two groups of studies on the deteriorating inventory model are discussed. The first group includes models that address quantity decay as the result of storage time, while the second one covers models that deal with value or utility decrease. Model of an Integrated Procurement-Production System for Food Products Incorporating Quality Loss during Storage Time Gusti Fauza, Yousef Amer, and Sang-Heon Lee International Journal of Materials, Mechanics and Manufacturing, Vol. 1, No. 1, February 2013 17 DOI: 10.7763/IJMMM.2013.V1.4