Inventory decisions for ameliorating products under consideration of stochastic demand

Abstract

Product quality is a key factor in the food and drinks industry, allowing companies to distinguish themselves from their competitors and achieve higher profit margins. However, the quality of a product may be subject to change over time and thus complicate planning and decision-making processes. While most of the literature in this area focuses on quality change in the form of deterioration, there are also products that improve in quality over time, resulting in unique challenges with regard to production and inventory management. In this context, this paper introduces an inventory planning problem for ameliorating products under consideration of demand uncertainty and product loss due to evaporation over time. This problem is solved using a MILP model within a rolling horizon approach. The proposed model is illustrated on two case studies from the cheese and whisky industry and investigates different scenario settings. The general findings show that the differences in profit margins between the quality categories influence the optimal strategy of the manufacturer and that the optimal aging and storage time should be kept to a minimum. Moreover, the results show that the rolling horizon approach is well-suited to handle the stochastic setting and that high demand fulfilment can be achieved as long as an appropriate planning horizon for the different products and product categories is considered • Stochastic problem formulation to study inventory decisions for ameliorating products. • Illustration based on two case studies from the cheese and whisky industry. • Analysis of different scenario settings related to uncertainty and other aspects. • Findings show the impact of profit margins on the optimal strategy of the producer.