In recent years, various researchers have discussed a two warehouse inventory system. This kind of system was first discussed by Hartely (1976) [10]. Hartely presented a basic two-warehouse model, in which the cost of transporting a unit from rented warehouse (RW) to own warehouse (OW) was not considered. Sarma (1983)[20] developed a deterministic inventory model with infinite replenishment rate and two levels of storage. In that model, he extended Hartely's model by introducing the transportation cost. Murdeshwar and Sathe (1985) [16] extended this model to the case of finite replenishment rate. Dave (1988) [5] further discussed the cases of bulk release pattern for both finite and infinite replenishment rates. He rectified the errors in Murdeshwar and Sathe (1985) [16] and gave a complete solution for the model given by Sarma (1983) [20]. In the above literature, deterioration phenomenon was not taken into account. In this paper, an inventory model is developed for deteriorating items with two- warehouse, permitting shortage under inflation and time-value of money. Holding costs and deterioration costs are different in OW and RW due to different preservation environments. The inventory costs (including holding cost and deterioration cost) in RW are assumed to be higher than those in OW. To reduce the inventory costs, it will be economical for firms to store goods in OW before RW, but clear the stocks in RW before OW. The stock is transferred from the RW to the OW following a bulk release rule.

Warehouse Inventory system Deterioration Linear time dependent deterioration optimal solution of system model