Please Customers or Prevent Wastage? Replenishment and Issuance Policy for a Perishable Product with Age-Sensitive Demand
An online retailer selling a perishable product can issue inventories of different remaining lifetimes in its preferred sequence. This creates a trade-off between customer satisfaction and outdating costs since customers want freshness, whereas the retailer desires units be sold within their lifetime. We study this trade-off by considering a joint replenishment and issuance policy for a perishable product with a general lifetime. Methodology/results: We develop a periodic review model over a finite horizon and model customers’ sensitivity to the received unit’s remaining lifetime using a goodwill cost, which increases as the remaining lifetime decreases. Although customer satisfaction is likely to be maximized by the last in, first out issuance policy and the outdating cost is likely to be minimized by the first in, first out (FIFO) issuance policy, neither policy may be optimal. In particular, when the product lifetime is two periods, it is optimal to first issue new inventory until a threshold and then issue the remaining inventory in the FIFO order. Although the value function is always concave, the optimal issuance policy can become complex for longer product lifetimes. Consequently, we focus on bucket policies in which inventory of each remaining lifetime is issued in a single installment. Our experiments showcase that the best bucket policy’s profit is within 0.1% of the optimal profit on average. Motivated by this result, we develop an easy-to-compute heuristic to determine a bucket policy and order quantity and computationally show that its performance is within 1.3% of the optimal profit on average. The heuristic also outperforms many replenishment and issuance policies proposed in the literature. Furthermore, the heuristic is asymptotically optimal with respect to the unit retail price. Managerial implications: Although optimal issuance policies that capture the trade-off between customer satisfaction and wastage because of expiry can often be complex, simple, effective, and easy-to-implement issuance policies can be identified, and the performance of these policies is close to optimal.
Please Customers or Prevent Wastage? Replenishment and Issuance Policy for a Perishable Product with Age-Sensitive Demand
An online retailer selling a perishable product can issue inventories of different remaining lifetimes in its preferred sequence. This creates a trade-off between customer satisfaction and outdating costs since customers want freshness, whereas the retailer desires units be sold within their lifetime. We study this trade-off by considering a joint replenishment and issuance policy for a perishable product with a general lifetime. Methodology/results: We develop a periodic review model over a finite horizon and model customers’ sensitivity to the received unit’s remaining lifetime using a goodwill cost, which increases as the remaining lifetime decreases. Although customer satisfaction is likely to be maximized by the last in, first out issuance policy and the outdating cost is likely to be minimized by the first in, first out (FIFO) issuance policy, neither policy may be optimal. In particular, when the product lifetime is two periods, it is optimal to first issue new inventory until a threshold and then issue the remaining inventory in the FIFO order. Although the value function is always concave, the optimal issuance policy can become complex for longer product lifetimes. Consequently, we focus on bucket policies in which inventory of each remaining lifetime is issued in a single installment. Our experiments showcase that the best bucket policy’s profit is within 0.1% of the optimal profit on average. Motivated by this result, we develop an easy-to-compute heuristic to determine a bucket policy and order quantity and computationally show that its performance is within 1.3% of the optimal profit on average. The heuristic also outperforms many replenishment and issuance policies proposed in the literature. Furthermore, the heuristic is asymptotically optimal with respect to the unit retail price. Managerial implications: Although optimal issuance policies that capture the trade-off between customer satisfaction and wastage because of expiry can often be complex, simple, effective, and easy-to-implement issuance policies can be identified, and the performance of these policies is close to optimal.