Joint Inventory and Markdown Management for Perishable Goods with Strategic Consumer Behavior

Abstract

In this paper we formulate and analyze a novel model on a firm’s dynamic inventory and markdown decisions for perishable goods. We consider a dynamic stochastic setting, where every period consists of two phases, clearance phase and regular-sales phase. In the clearance phase, the firm decides how much to order for regular sales, as well as whether to markdown some (or all) of the leftover inventory from the previous period that will be disposed otherwise. Since strategic consumers may buy the product during clearance sales for future consumption, markdown may cannibalize future sales at regular price. Hence, the firm needs to make a trade-off between product spoilage and intertemporal demand substitution. We show that the firm should either put all of the leftover inventory on discount or dispose all of it, and the choice depends on the amount of leftover inventory from the previous period. In particular, the firm should introduce markdown when the amount of leftover inventory is higher than a certain threshold, and dispose all otherwise. We also conduct numerical studies to further characterize the optimal policy, and to evaluate the loss of efficiency under static policies when compared to the optimal dynamic policy.

Economic Order Quality Model for Determining the Sales Prices of Fresh Goods at Various Points in Time

“…(a) The optimal inventory cycle * and the initial inventory standard * (0) both increased as the setup cost increased; the rate of change is displayed in (31) and (29). (b) * and * (0) both increased as the expiration time of the goods increased; the rate of change is shown in (32) and (29). (c) * and * (0) both decreased as the inventory cost ℎ increased; the rate of change is illustrated in (34) and (29).…”

“…By partially differentiating ℎ with (23), the following formula is obtained (see Appendix B for details): (verified using Figure 3 and referencing (32) and (33)). …”

“…The assumption of the traditional EOQ model has been relaxed from "the demand rate is a given constant" to "the demand rate varies according to time" [13][14][15][16][17][18][19][20][21][22][23][24][25][26][27][28][29][30][31][32].…”

Quality and Operations Management in Food Supply Chains: A Literature Review

“…The author found that an optimal pricing policy is to implement price discrimination with respect to consumers' sensitivity to freshness, while dynamically changing the price over time, starting with a lower price at the early stages of the product's shelf life and increasing it at a later stage. Hu et al [85] established a joint inventory and price markdown model considering customers' strategic behaviors. To reduce costs, the firm can either choose to discard the leftover inventory or set a clearance price.…”

Selling luxury fashion to conspicuous consumers in the presence of discount sensitivity behavior

“…Hu et al. () examine the impact of strategic consumer behavior for perishable products on firms’ dynamic inventory decision. They find that the firm should either discount or dispose of all of the leftovers in order to eliminate strategic consumer behavior.…”