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Managing Perishables with Substitution: Inventory Issuance and Replenishment Heuristics

Joseph W. Luter, III School of Business, Christopher Newport University, Newport News, Virginia, 23606
R. H. Smith School of Business, University of Maryland, College Park, Maryland, 20742
Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania, 15213
borga.deniz{at}cnu.edu
ikaraes{at}rhsmith.umd.edu
awolf{at}andrew.cmu.edu

We consider a discrete-time supply chain for perishable goods having separate demand streams for items of different ages. For a good that has two periods of lifetime, we build a model that generalizes and/or subsumes many of the models in the literature and study the effectiveness of two intuitive heuristic (base-stock) replenishment policies combined with different substitution rules. For each replenishment policy, we identify sufficient conditions on cost parameters for a substitution rule to be economically superior to others under our base-stock replenishment policies. Our analysis shows that the replenishment policy almost universally advocated in the perishable inventory literature may lead to pathological behavior when used with issuance rules that pool inventory (via substitution) to satisfy multiple, age-differentiated demand streams. Furthermore, we find that system behavior is typically more predictable, and potentially less costly, under a policy long-discarded in the literature that ignores the inventory of aged items, ordering a constant amount each period. Thus the benefit of pooling inventory for substitutable, perishable products depends critically on the replenishment policy used.

Key Words: inventory management; perishable goods; substitution; heuristics
History: Received: July 7, 2008; accepted: May 28, 2009.