Managing perishable production systems with extended shelf life: The role of sustainability

A common way to reduce the waste from expired raw materials in perishable supply chains is to transform perishable raw materials into relatively non-perishable end products with extended shelf life. We consider how to coordinate production and ordering for a periodic-review serial inventory/production system in which the perishable raw material is transformed into a non-perishable end product over a finite planning horizon. When the lifetime of the raw material has a fixed lifetime, we first derive a condition that ensures the optimality of the first-in first-out policy. More interestingly, we find that if the unit expiration cost exceeds a threshold in a period, a raw material no-disposal policy is optimal and the value function in each subsequent period is decomposable under a state transformation. As a result, in each of these periods, the optimal production policy is an age-differentiated base-stock policy and the optimal ordering policy is a base-stock policy. Thus, a high unit expiration cost not only makes the supply chain more sustainable but also can simplify the operational strategy significantly. Our results provide operational guidelines and insights on managing this type of perishable production systems and improving sustainability.