PRICING AND LOT-SIZING DECISIONS FOR PERISHABLE PRODUCTS WHEN DEMAND CHANGES BY FRESHNESS

Abstract

Perishable products like dairy products, vegetables, fruits, phar-maceuticals, etc. lose their freshness over time and become completely obsolete after a certain period. Customers generally prefer the fresh products over aged ones, leading the perishable products to have a decreasing demand function with respect to their age. We analyze the inventory management and pricing decisions for these products, considering an age-and-price-dependent stochastic demand function. A stochastic dynamic programming model is developed in order to decide when and how much inventory to order and how to price these products considering their freshness over time. We prove the characteristics of the optimal solution of the developed model and extract managerial insights regarding the optimal inventory and pricing strategies. The numerical studies show that dynamic pricing can lead to significant savings over static pricing under certain parameter settings. In addition, longer replenishment cycles are seen under dynamic pricing compared to static pricing, even though similar quantities are ordered in each replenishment.