Replenishment strategies for lost sales inventory systems of perishables under demand and lead time uncertainty

Abstract

We develop an inventory control policy for perishable products considering both random demand and random lead time. We consider a B2C retail environment where excess demand is lost. The policy dynamically determines the optimal replenishment quantity under a service level constraint in every period, allowing for order-crossing, a widely disregarded characteristic in the literature. Regarding perishability, we compare the two most extreme issuing policies, first-expired-first-out (FEFO) and last-expired-first-out (LEFO), and evaluate our policy to existing inventory policies for perishables that typically ignore lead time uncertainty.We obtain several interesting findings. First, we show that ignoring lead time uncertainty and planning based on the expected lead time significantly undershoots the target service level. Even planning with the maximum lead time, under LEFO, the achieved service level would still fall considerably below the target, which the lost-sales structure can explain. On the other hand, under FEFO, the achieved service level would overshoot the target service level, which leads to unnecessary waste. Second, a more reliable lead time can significantly reduce waste, especially under LEFO. Third, our model allows us to distinguish between past, present, and future lead time uncertainty and thus to consider partial lead time information. We show the value of lead time information on outstanding orders. Fourth, we evaluate the impact of a fast but unreliable delivery option and a slow but reliable delivery option on the retailer’s average waste and ordering process. We find that the optimal choice depends on the demand characteristics.