Inventory model for a fresh product when demand depends on freshness, price, inventory level and expiration date under markdown policy

Abstract

In practice, the demand for a fresh product depends on how fresh it is, therefore, it is important to take expiration date into consideration as it is a key to determine the freshness level of any perishable items. Furthermore, based on marketing and economic theory, selling price plays a crucial role in influencing the demand. Also, a higher inventory level may enhance the profit as it encourages consumers to buy more. Since the demand for fresh product declines over time, markdown policy is offered after some time to increase the demand and profit while reducing the inventory. For this demand function, it may be profitable to maintain a high stock level and the zero ending inventory is relaxed to non-zero ending inventory. Salvage value is incorporated into the deteriorating units. Using differential equations, we propose an economic order quantity model which demand dependent on freshness-expiration date, price and inventory level under markdown policy. We also demonstrate the relationship between markdown time and the annual total profit. Numerical example and sensitivity analysis are used to illustrate the effectiveness of the model.