Inventory Optimization for Perishables Subject to Supply Disruptions

Abstract

We study a retailer selling perishable products with fixed lifetime. Retailer's supply system is subject to random disruptions. Assuming a base-stock policy, deterministic demand and stationary parameters, we derive an expression for the expected cost function which consists of holding, backordering and perishing costs. After analyzing the properties of this function, we determine the closed form expression for the optimal base-stock level. This is the first paper to study the effects of supply disruptions on perishable-product inventory systems. Our analysis suggests that the optimal base-stock level depends on the lifetime but not on the unit perishing cost. We show that, for items with short lifetime, the choice of the base-stock level has a bigger impact on the cost than for items with a longer lifetime. We also show that if the retailer can manage to make the system safer, it is possible to operate with the same expected cost even with products with shorter lifetime. When it comes to disruption management, we conclude that companies should concentrate more on reducing the duration of supply disruptions instead of trying to prevent them. Finally, we show how to use our model for systems with stochastic demand and non-stationary parameters.