A heuristic procedure for determining ordering and price-discount policies for commodities with two-period perishability

Abstract

In this paper, the problem of jointly setting order quantity of fresh items and discount price of one-period old items is modelled as a stochastic dynamic program for commodities that perish in two periods. It is solved using a heuristic procedure that decouples inventory decisions in any two consecutive periods by assuming a salvage value of leftover fresh items that is also the price paid for the entering stock of one-period-old items. For an assumed salvage value, the single period expected profit maximizing ordering - discount policy pair is identified. The m-periods planning problem is then solved by sequentially solving m single period problems. Numerical examples reveal some valuable insights about the inter-dependencies between order quantity and discount price. The percent discount is found to be insensitive to the assumed salvage value.