Optimal ordering, issuance and disposal policies for inventory management of perishable products

Perishables, such as packed fresh food and pharmaceutical products (a.o. blood products), typically have a fixed shelf life set by a fixed use-by date or sell-by date. Despite their limited life time, orders in practice are usually based on the stock level irrespective of the ages of the products in stock. The management of inventories of such products can be improved by applying stock-age dependent ordering, issuing, and disposal policies. This paper investigates cost reductions that can be achieved by an optimal stock-age dependent ordering, issuing, or disposal policy as obtained by Stochastic Dynamic Programming. Orders are made before the uncertain demand is revealed. When demand turns out to be relatively low, a disposal policy enables to get rid of excess (old) stock. Disposal decisions are an understudied area, but may be relevant to retailers for which displaying the freshest items is of high importance. Also blood banks prefer not to issue products that are about to expire as transfusion of younger blood products is more effective. This paper fills a research gap identified in Karaesmen et al. (2011): the paper appears to be the first to report optimal stock-age dependent disposal decisions, both under a base stock policy and under optimal stock-age dependent ordering. Results of optimal stock-age dependent ordering, disposal, and issuance are compared to a base stock policy, which is commonly used in practice. Under FIFO issuance, the added value of an optimal disposal policy is high. An optimal disposal policy in combination with optimal ordering reduces the average costs only when issuing old products is penalized, e.g. by selling at a discounted price. Under LIFO issuance, an optimal disposal policy has significant impact when orders are set by a BSP, but not under optimal stock-age dependent ordering. When no penalty or discount applies, disposals reduce costs only in case of suboptimal ordering, e.g. by a BSP