Optimal ordering and disposal decisions for products with a fixed shelf life

Abstract

In this paper, motivated by the current increasing interest and action on food waste reduction, inventory decisions of a retailer who deals with a product that has a fixed shelf life are studied. Being a common strategy of many retail stores, we assume that at a specific time instant, close to the expiration date, a price markdown is offered in order to increase demand. However, at the same time, due to customers’ attention to the freshness of the product, the demand becomes a decreasing function with respect to the time remaining before the expiration date. In accordance with the European Union food donation guidelines, we assume that if at the end of the reorder interval unsold items remain that have not exceeded their expiration date, they can be donated to non-profit organizations for human consumption. The donated products can generate direct revenue from tax deductions and indirect revenue by increasing the company’s reputation and gain of goodwill from the customers. If the unsold items have expired, they can be sold at a salvage price to the livestock market. The aim of our model is to determine the reorder interval, the time instant to markdown the product’s initial selling price and the quantity that will be donated or sold to the livestock market so that the profit of the system is maximized. Closed form solutions are obtained, which depend on specific parametric conditions, providing managerial insights.