Perishable Product Inventory Management In The Case Of Discount Policies And Price-Sensitive Demand: Discrete Time Simulation And Sensitivity Analysis

Abstract

In B2C contexts, the demand is normally shifted towards products with higher residual shelf life (LEFO issuing policy). In such contexts, the risk is that products closer to the expiration date could not be picked up by consumers, thus reaching the end of their shelf life unsold, with the need to be disposed of. To reduce the extent of this phenomenon, retailers can promote the sale of expiring products by introducing appropriate discount policies. In this paper, a multi-period discrete-time simulation model is developed considering perishable products, having a fixed and deterministic shelf life, issued according to a periodic review policy. A mixed LEFO-FEFO issuing policy was considered. Specifically, in the absence of discount policies, the demand is fulfilled according to LEFO logic. When a discount policy is applied, a portion of the demand, proportional to the discount, shifts to discounted expiring products and is handled according to FEFO logic. The discount policy was defined as a percentage discount, applied to products with a residual shelf life of less than a defined number of days. The presented model was applied to a specific case study and a sensitivity analysis was performed to assess the impact of both the discount policy and other contour variables, such as demand parameters (mean and standard deviation), lead time (LT) and product shelf life (SL), on average daily profit (P). The results show that, for the context analysed, the introduction of a proper discount policy leads to an increase in P of between 0.31% and 2.45%. Moreover, it was obtained that demand variability positively affects the impact of discount policies. Sensitivity analysis finally showed that P is negatively correlated with LT and positively correlated with SL.