Shipment Policies for Products with Fixed Shelf Lives: Impact on Profits and Waste
35 Pages Posted: 11 Nov 2018
Date Written: September 10, 2018
Problem definition: Our research is motivated by the product expiration problem in consumer-packaged-goods retailing, which creates substantial landfill waste and drains firm profits. We analyze shipment policies as they affect the age of inventory at the warehouse and at the retail store, impacting expiration levels.
Academic and Practical Relevance: The same firm often bears the cost of expiration at the warehouse and the retail store, which necessitates a supply chain perspective. First-In-First-Out (FIFO) is a common shipment policy in practice, which is advocated by industry experts to control waste. While the optimality of FIFO at a single location is well-established in the literature, it has not been studied in the context of a two-stage supply chain.
Methodology: The primary solution method in our analytical study is dynamic programming. We also use statistical analysis to study inventory aging and FIFO shipment practices using data from a consumer-packaged-goods company.
Results: FIFO is not optimal in a two-stage setting and the optimal policy has a complex structure. We develop a heuristic policy based on a relaxed version of the problem which, in our numerical analysis, yields an average optimality gap of 13% versus 29% for FIFO. Compared to the optimal shipment policy, FIFO reduces inventory aging at the warehouse but increases it at the retail store.
Managerial Implications: Because product waste at the retail store is more likely to be disposed of at landfills as opposed to being donated, FIFO may have an adverse impact on the environment as well as on firm profits. Practitioners can therefore significantly benefit from the technological improvements which would allow them to implement more sophisticated shipment methods, such as the heuristic policy we develop, to improve profits and reduce waste.
Keywords: perishable inventory, two-echelon, shipment policy, food waste, waste, data-driven research, consumer packaged goods, direct store delivery, dynamic programming
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