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Coordinating Inventory Control and Pricing Strategies for Perishable Products

Author

Listed:
  • Xin Chen

    (International Center of Management Science and Engineering, Nanjing University, Nanjing 210093, China; and Department of Industrial and Enterprise Systems Engineering, University of Illinois at Urbana--Champaign, Urbana, Illinois 61801)

  • Zhan Pang

    (International Center of Management Science and Engineering, Nanjing University, Nanjing 210093, China; and Lancaster University Management School, Lancaster LA1 4YX, United Kingdom)

  • Limeng Pan

    (Department of Industrial and Enterprise Systems Engineering, University of Illinois at Urbana--Champaign, Urbana, Illinois 61801)

Abstract

We analyze a joint pricing and inventory control problem for a perishable product with a fixed lifetime over a finite horizon. In each period, demand depends on the price of the current period plus an additive random term. Inventories can be intentionally disposed of, and those that reach their lifetime have to be disposed of. The objective is to find a joint pricing, ordering, and disposal policy to maximize the total expected discounted profit over the planning horizon taking into account linear ordering cost, inventory holding and backlogging or lost-sales penalty cost, and disposal cost. Employing the concept of L (natural) -concavity, we show some monotonicity properties of the optimal policies. Our results shed new light on perishable inventory management, and our approach provides a significantly simpler proof of a classical structural result in the literature. Moreover, we identify bounds on the optimal order-up-to levels and develop an effective heuristic policy. Numerical results show that our heuristic policy performs well in both stationary and nonstationary settings. Finally, we show that our approach also applies to models with random lifetimes and inventory rationing models with multiple demand classes.

Suggested Citation

  • Xin Chen & Zhan Pang & Limeng Pan, 2014. "Coordinating Inventory Control and Pricing Strategies for Perishable Products," Operations Research, INFORMS, vol. 62(2), pages 284-300, April.
    • Handle: RePEc:inm:oropre:v:62:y:2014:i:2:p:284-300
    DOI: 10.1287/opre.2014.1261
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    References listed on IDEAS

    as
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