Issuing for perishable inventory management with a minimum inventory volume constraint

Abstract

We study a perishable inventory system that requires to maintain a minimum inventory volume at all times, where the minimum amount in the constraint is significant with respect to regular market demand and the traditional Economic Manufacturing Quantity (EMQ) models do not suffice. The problem is motivated by applications in homeland security, which are related to the management of pharmaceuticals in the Strategic National Stockpile (SNS) for emergency preparedness. We use a modified EMQ model to represent the system and consider the issuing policy given a fixed ordering quantity, as well as the joint ordering and issuing policy problem. We aim to maximize the profit of the system under a linearly-decreasing price structure assumption. We first present the optimal issuing policy with a given ordering quantity for this modified EMQ model. Then we demonstrate that maximizing the revenue of the ordering policy with FIFO (first-in, first-out) and LIFO (last-in, first-out) issuing policies can be formulated as a non-convex non-smooth unconstrained optimization problem. The properties of both problems (e.g. optimizing issuing policy with a fixed ordering quantity and optimizing ordering policy with a fixed issuing policy) is analyzed and an efficient exact algorithm is presented to solve the joint ordering and issuing problem. We show that the LIFO issuing policy is optimal with a linearly-decreasing price structure that deteriorates with the age of the item.