Joint Ordering and Markdown Policy for Short Lifetime Products With Competitive Price- and Freshness-Based Demand

Abstract

Retailers with short lifetime products in stock always face a problem of whether new products should be ordered when on-hand products partially decay and how to deal with the old products if a new batch is ordered. In this article, we consider the sales of a perishable product with a fixed short lifetime in two shelves, where new items of the product in a regular shelf are sold in a preset normal price, and old items in a markdown (discount) shelf are sold in a discounted price. We study the problem of the joint ordering of new items and pricing of old items and propose a joint ordering and markdown policy when the demand of the product depends on its price, and freshness as well as unsatisfied demand is lost. First, we formulate a one-period model, in which the present shelf ages of items in the two shelves are considered and use the Karush–Kuhn–Tucker condition to analytically obtain the optimal solution of the joint ordering and markdown problem. Second, numerical experiments are conducted to evaluate the performance of the two-shelf policy when the optimal solution of the one-period model is applied to the multiperiod problem in the form of a myopic policy. The results show that the proposed two-shelf joint ordering and markdown policy for perishable products performs better than the traditional one-shelf policy. <italic xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">Note to Practitioners</i> —In this article, we develop a joint ordering and markdown policy for perishable products deployed on two shelves: a regular shelf for fresh products and a markdown shelf for less fresh products. Although the closed-form policy is obtained for the one-period situation with deterministic demand, it is not difficult to extend it to the multiperiod case with random demand. This article not only reveals the underlying reason of employing both regular shelf and markdown shelf in the practice of retailing management for perishable products but also proposes an easy-to-implement ordering and markdown policy, which will bring higher profit than the traditional one-shelf policy and will improve the performance of managing a perishable products retailing system.