Optimal inventory policy for a perishable item with demand function

sensitive to price and time

Tal Avinadav
a,n
, Avi Herbon
a
, Uriel Spiegel
a,b
a
Department of Management, Bar-Ilan University, Ramat-Gan, Israel
b
Department of Economics, University of Pennsylvania, PA, USA
a r t i c l e i n f o
Article history:
Received 14 March 2012
Accepted 8 March 2013
Available online 6 April 2013
Keywords:
Inventory
Price elasticity
Deterministic demand
Perishability
a b s t r a c t
We formulate a model for determining the optimal pricing, order quantity and replenishment period for
perishable items with price-dependent and time-dependent demand. The items have a xed shelf-life,
and the demand rate decreases linearly in the selling price and polynomially over the time after
replenishment, until it vanishes either at the reservation price or at expiration time. We prove that the
three-variable prot maximization problem can be reduced into a single-variable problem, in which the
variable is the duration of the replenishment period. We show that the prot function is strictly pseudo-
concave and provide means of obtaining the optimal policy. Three numerical examples are presented to
demonstrate the model accompanied by a sensitivity analysis.
& 2013 Elsevier B.V. All rights reserved.
1. Introduction
The primarily negative relationship between the price of a
product and the quantity demanded is well established (see
Kocabiyikoglu and Popescu (2011) for examples of some common
price-dependent demand functions). Yet, in addition to price,
there are several other marketing-related factors that may affect
the demand for a product at a given time (hereafter referred to as
the demand rate). Bose et al. (1995) developed a deterministic
model for an item whose demand follows a linear trend over time.
Wu et al. (2006), Chang et al. (2010) and Devangan et al. (2013),
following Baker and Urban (1988), considered also the inuence of
the quantity on-hand on retail product demand (an effect asso-
ciated with the impact of shelf-space allocation). Avinadav and
Arponen (2009) suggested a demand rate that is positively
affected by the remaining shelf-life of the product, since higher
time-to-expiry indicates better freshness and higher quality.
In this work we focus on nding optimal pricing and inventory
policies while considering the effect of two marketing motivators:
price and remaining shelf-life duration. While the effect of price
on demand has been thoroughly analyzed in the literature (see, for
example, Petruzzi and Dada (1999) and several more examples in
the next section), there is a paucity of research on the effect of the
remaining shelf-life duration despite its importance in modeling
the demand rate of perishable items (including most grocery
items, such as dairy products, bread, beverages and many other
industrial food products, as well as ammunition, batteries and
printer ink). In general, the age of inventory is likely to negatively
affect the demand for perishable goods. Sarker et al. (1997) claim
that this effect occurs because consumers tend to feel less
condent purchasing perishable items whose expiration dates
are approaching. Some items, such as range ammunition, suffer a
negligible decrease in demand up to their expiration date, since
they are used immediately after being purchased. On the other
hand, the demand for self-defense ammunition is sensitive to the
inventory's remaining shelf-life, since it is (hopefully) less likely to
be used before its expiration.
Our approach seeks to contribute toward the efcient manage-
ment of perishable inventory and the prevention of waste. Waste
is a key source of food loss in supply chains and in inventory
systems with perishable items, and it is inuenced by managerial
factors as well as by technological factors, including production
facilities, preservative materials, packaging, storage, and transpor-
tation conditions, all of which are vital for maintaining a product's
shelf-life. Prevention of food waste is of particular interest in the
discussion of perishable inventory management, as perishable
food products are a main source of prot for grocery retailers.
According to Donselaar and Broekmeulen (2012), the United
States Department of Agriculture (USDA) estimates that average
annual food losses in supermarkets in 2005 and 2006 were 11.4%
for fresh fruit, 9.7% for fresh vegetables and 4.5% for fresh meat,
poultry and seafood. Global trends indicate a future further
increase of waste. A possible explanation of this trend is the
increasing number of supermarkets (Partt et al., 2010), as well as
the growth of household incomes, which increases the demand for
perishable products (e.g., Partt et al. (2010) indicate that the
Contents lists available at SciVerse ScienceDirect
journal homepage: www.elsevier.com/locate/ijpe
Int. J. Production Economics
0925-5273/$ - see front matter & 2013 Elsevier B.V. All rights reserved.
http://dx.doi.org/10.1016/j.ijpe.2013.03.022
n
Corresponding author. Tel./fax: +972 3 5318143.
E-mail address: tal.avinadav@biu.ac.il (T. Avinadav).
Int. J. Production Economics 144 (2013) 497506
demand for meat in China is increasing rapidly). Retailers incur
heavy costs for wasted goods, as in addition to lost sales, they must
bear the disposal costs of expired items.
This paper proposes a model that can be used as a tool in the
management of perishable inventory in general and food products
in particular, enabling retailers to compare the expected maximal
prots of substitute goods, which are different in their unit
purchase cost and in their shelf-life duration, and decide which
product is more protable, given consumers' sensitivity to fresh-
ness. Furthermore, the model allows us to calculate the loss of
prots to a retailer who ignores the decrease in the demand rate
due to loss of freshness, and uses only a price-dependent demand
function (as common in the literature).
The rest of this paper is arranged as follows: In Section 2 we
review the literature on the effects of pricing policy and of time on
the demand rate, and we position our model in relation to
previous work. Section 3 details the model assumptions and
notations. In Section 4, we formulate the model as a prot
maximization problem, and in Section 5, we nd the optimal price
for a given replenishment period. In Section 6, we present a
thorough analysis of the prot function and properties of the
optimal solution. A detailed algorithm is provided to obtain the
optimal pricing and inventory policies efciently. In Section 7,
numerical examples are given to illustrate the model, followed by
a sensitivity analysis. We sum up with a discussion of this work
and suggest directions for future research.
2. Literature review
The literature dealing with pricing policy in inventory models
began with Whitin (1955) and was subsequently developed by
Mills (1959), Karlin and Carr (1962) and Zabel (1970, 1972). The
latter studies rened Whitin's formulation by specifying demand
parameters as a function of the selling price, and they were further
investigated in Young (1978), Polatoglu (1991), Petruzzi and Dada
(1999) and recently in Guowei et al. (2012). Important works on
pricing in the context of inventory of perishable items appear in
the literature reviews of Silver (1981), Nahmias (1982),
Weatherford and Bodily (1992) and Gallego and van Ryzin
(1994). Chun (2003) considered dynamic price adjustments when
the xed order cost and holding costs are ignored; his approach
departed from that of most previous works, which assumed that
price is determined at the start of the sales period and remains
xed. In a recent work, Herbon et al. (2012) captured the main
characteristics of the effect of price differentiation in a stochastic
deteriorating inventory with heterogeneous consumers.
The literature dealing with time-dependent demand rate
mostly focuses on cases in which the inuence of time on demand
is measured relative to a specic point in time, such as the
introduction of a new product into the market (e.g., Bahari-
Kashani (1989), Bose et al. (1995), Benkherouf (1995), Teng
(1996), and Balkhi and Benkherouf (2004)). Most studies addres-
sing the effect of the time elapsed from replenishment on demand
rate have done so indirectly, such as in the case of inventory-level-
dependent demand, which can be converted (by solving a differ-
ential equation) to a dependency of the demand rate on the order
size and time after replenishment. Examples of inventory-level-
dependent demand models appear in Urban (2005), who presents
a literature review of deterministic models, Wu et al. (2006), who
extended the model to include non-instantaneous deterioration of
items, and recently in Devangan et al. (2013), who extended the
model to stochastic demand. A different approach is used by
Avinadav and Arponen (2009) who considered directly the fresh-
ness effect of products' remaining shelf-life duration on the
demand rate.
Recent works, such as You and Hsieh (2007) and Chang et al.
(2010), suggested models that incorporate both inventory-level
and price effects on the demand rate. However, there is a paucity
of (direct) research on the combined effects of both price and time
after replenishment on the demand rate of a perishable item. To
our knowledge, only three studies have combined these two
effects. You (2005) assumed an additive inuence of the two
factors, studying a case in which the price effect is linear and the
time effect is negative-exponential. Valliathal and Uthayakumar
(2011) assumed a general multiplicative inuence of these two
factors when demand is convex in price. They introduced an
algorithm to obtain optimal pricing and replenishment policies;
however, their algorithm, which required solving iteratively a
system of three equations, does not guarantee convergence
towards the optimum. Maihami and Kamalabadi (2012) assumed
a special case of multiplicative inuence of these two factors,
where price has a linear effect and time has an exponential
effect.
Our study specializes in perishable items with a nite expira-
tion date (at which demand vanishes). In order to capture this
property, and since in many real-life cases only part of the
inventory is presented to the consumers (while part of it is stored
in a backroom warehouse), we assume a negative inuence of the
time following replenishment on the demand rate and not a
positive inuence of the inventory level as used, for example, by
Wu et al. (2006) and Devangan et al. (2013). Specically, we
assume a multiplicative effect of price and time on the demand
rate, which implies that a change in one factor has a xed relative
(percentage) effect, for any value of the other factor. Similarly to
You (2005) and Maihami and Kamalabadi (2012), we assume a
linear effect of the price on the demand rate, and, like Avinadav
and Arponen (2009), we assume that the demand rate decreases
polynomially over time following replenishment, until it vanishes
at the expiration date of the perishable item (which is known to
the consumer). The polynomial function is more exible (can be
convex, concave or linear) than the convex exponential function
(used, e.g., by You (2005), You and Hsieh (2007), Maihami and
Kamalabadi (2012)), and thus may t better to modeling the
demand for perishable items with a known expiration date (see
next section). In our model, beyond the expiration date of the
product, the effective demand (i.e., the willingness to buy it) is
zero regardless of the retail price or the quantity of leftover units,
although the demand for fresh units of the product (i.e., the
potential demand) always exists.
Our model is distinct from previous works in reducing the
three-variable optimization problem into a single-variable one,
and in providing an efcient line-search algorithm that is guaran-
teed to obtain the optimal solution. Specically, we develop a
closed-form expression of the optimal price and order quantity,
given the replenishment period, and we prove that the prot
function is pseudo-concave over a bounded interval of the replen-
ishment period.
3. Assumptions and notation
Consider an inventory system of a single perishable item that is
periodically being replenished over an innite planning horizon
with an ordering set-up cost. Here below, we summarize the
assumptions of the model.
1. Replenishment rate is innite with a xed lead-time.
2. Backlogging is not possible.
3. All items in an order have identical shelf-life duration that is
known to the consumers.
4. There is no demand for items that passed their expiration date.
T. Avinadav et al. / Int. J. Production Economics 144 (2013) 497506 498
5. The demand rate function is deterministic and is a multiplication
of two factors: selling price and time after replenishment.
6. The demand rate decreases linearly in the selling price and
polynomially over the time after replenishment.
The following notations are used throughout the paper:

Parameters
Ethe shelf-life duration of an item.
Kthe xed ordering cost per replenishment.
cthe purchasing cost per unit.
hthe unit inventory holding cost per unit time.

Decision variables
Qthe order quantity.
pthe selling price of a unit.
Tthe replenishment period.

Variables
tthe time elapsed from replenishment (a measure of
freshness).
p; tthe demand rate at t, given p.
IQ; p; tthe inventory level at t, given p and Q.
Q; p; Tthe prot per replenishment period, given p, Q and
T.
Q; p; Tthe prot per unit time, given p, Q and T.
In order to extend our conclusions we formulate a polynomial
decreasing demand function, whose exible shape is determined
according to a given shape parameter. Unlike the negative-
exponential function, which is commonly used in the literature
(see You (2005), You and Hsieh (2007), Maihami and Kamalabadi
(2012)), the polynomial function supports concave decrease. The
polynomial function is a better match to describe demand over
time for perishable food products, many of which undergo a mild
(or even negligible) decrease in demand when their expiration
date is distant that accelerates as the products approach their
expiration date. This concave decrease can be explained by the
awareness of consumers that products with short remaining shelf-
life should be used very close to their purchase date, due to their
inferior quality. This element has recently been discussed by Wu
et al. (2006) and Musa and Sani (2012), who claim that almost all
the inventory models for deteriorating items assume that the
quality deterioration occurs as soon as the retailer receives the
commodities. Yet the authors note that, in reality, there are many
products, such as vegetables, fruit, sh, meat, certain breads or
dairy products, whose deterioration in quality is negligible during
a certain initial period on the shelves (or in refrigerators). After the
initial period passes, the inuence of deterioration on the pro-
duct's quality (e.g., taste, shape, utility, etc.) is noticeable, and
consequently the demand for the product diminishes at larger
rates. This phenomenon, which Wu and colleagues refer to as
non-instantaneous deterioration, lies in contrast to the common
assumption of instantaneous deterioration.
For the effect of price on demand, we use the common negative
linear relation (e.g., You (2005), You and Hsieh (2007), Maihami
and Kamalabadi (2012)). We assume that the price is set in
advance of the sale, and is not negotiable with potential
consumers.
According to assumptions 5 and 6 and the above discussion,
t; p

0
1p1t=E
n
t E ; p
1
0 otherwise
_
1
where
0
is the demand scale parameter, n is the shape parameter
of the demand decrease in time n40; and
1
is the reservation
price, at which demand vanishes. While linear decrease of demand
in price is common in the literature, polynomial decrease over
time is rare (e.g., see Avinadav and Arponen (2009)). However, the
function is general enough to support a variety of decreasing
shapes, as illustrated in Fig. 1: convex decrease for 0ono1; linear
decrease for n 1; concave decrease for n41; and no decrease for
n-.
The advantage of the polynomial demand function over t is the
ability to support concave decrease of demand over time. This kind
of decrease ts the demand trajectory of most perishable grocery
products.
4. Model formulation
The prot per replenishment period, Q; p; T, includes three
economic elements: the prot margin of sold units excluding
holding cost, pcQ; the inventory holding costs, h
_
T
0
IQ; p; tdt,
and the xed ordering cost, K. The objective function, prot per
unit time, which should be maximized with respect to the three
decision variables (Q, p and T) is:
Q; p; T
Q; p; T
T

pcQh
_
T
0
IQ; p; tdtK
T
2
It is clear that when the system is protable then the inventory
level should always be positive, since unsatised demand is lost. It
is also known (see, for instance, Silver and Peterson, 1985) that in
the case of a constant demand rate, it is optimal to order exactly
when the inventory vanishes. The only exception where optimal
replenishment may occur at a positive inventory level was
demonstrated by Baker and Urban (1988) in the case of
inventory-level-dependent demand rate. In our model, in which
the demand rate depends only on the selling price and time after
replenishment, the order quantity can be lowered by the positive
amount of the inventory at the time of replenishment to increase
prot. Therefore, we can conclude that
Proposition 1. Optimal replenishment occurs exactly when
inventory is exhausted.
Consequently,
Corollary 1. In a protable system, the optimal replenishment
period is smaller than or equal to the shelf-life duration of
the item.
Proof. Using a replenishment period T, T 4E, leads to subopti-
mal prots per unit of time (since the remaining units after t E
are expired, and by assumption 4, there is no income over the
interval E; T).
Thus, assuming a protable system, T can be restricted to be not
greater than E.
1
E
t
0
0<n<1
n
n>1
n0
n=1
(p,t)
Fig. 1. (p,t) for a given p and various values of n.
T. Avinadav et al. / Int. J. Production Economics 144 (2013) 497506 499
Corollary 2. Given p and T, the optimal inventory level at time t,
I
p;T
t, is equal to the cumulative demand from time t up to the end
of the replenishment period, i.e.
I
p;T
t
_
T
t
p; d
By Corollary 2, given p and T, the optimal order quantity, Q
p;T
, is
equal to the total demand in the replenishment period, so that
Q
p;T
I
p;T
0
_
T
0
p; tdt 3
Substituting Q
p;T
for Q and I
p;T
t for IQ; p; t in (2), the
objective function can be reduced from a three-variable formula-
tion into a two-variable (p and T) formulation:
p; T
pc
_
T
0
p; tdth
_
T
0
_
T
t
p; ddtK
T
Substituting
_
T
0
_
T
t
p; ddt
_
T
0
_

0
p; dtd
_
T
0
tp; tdt,
the objective function can be further simplied to
p; T
pc
_
T
0
p; tdth
_
T
0
tp; tdtK
T
4
In order to formulate (4) explicitly for the specic demand rate
in (1) we use both:
_
T
0
1t=E
n
dt T 1
T=E
n
n 1
_ _
5
and
_
T
0
t1t=E
n
dt
T
2
2
1
2T=E
n
n 2
_ _
:
Now, the prot maximization problem, considering our sug-
gested price and time-dependent demand function, can be refor-
mulated as
max p; T
0
1p pc 1
T=E
n
n 1
_ _

hT
2
1
2T=E
n
n 2
_ _ _ _

K
T
_ _
S:t: T E
copo
1
6
The two added constraints, T E and copo
1
, exclude values
of T and p that are non-optimal or non-protable, respectively.
5. Optimal selling price given a replenishment period
In this section we nd p
T
, the optimal price given a replenish-
ment period, and provide bounds for it that are one sixth of the
trivial bounds on p in (6). Suppose that a replenishment period T
T E is given. Then the rst and second derivatives of the prot
function are,

p
p; T
0

1
c2p 1
T=E
n
n 1
_ _

hT
2
1
2T=E
n
n 2
_ _ _ _
7
and

2
p
2
p; T 2
0
1
T=E
n
n 1
_ _
8
By (6) and the negativity of (8), the prot function, p; T, is
quadratic and strictly concave in p for a given T T E. Hence,
equating (7) to zero, the optimal p for a given T is expressed by
p
T


1
c
2

hT
2
n 1
n 2
1
n
2n 1T=E
n

_ _
9
To prove that p
T
is feasible, i.e. cop
T
o
1
, we rst show that a
positive prot margin imposes a constraint on the replenishment
period.
Lemma 1. The optimal replenishment period of a protable item
cannot exceed the duration that, due to holding costs, zeroes the
prot margin of an inventory unit (i.e., the optimal T satises
T p
T
c=h).
Proof. See Appendix A.
By Corollary 1 and Lemma 1, the optimal replenishment period
satises
T min E; p
T
c=h
_ _
10
We now provide bounds on p
T
that reduce its original and
trivial interval of uncertainty, copo
1
, to one sixth of it, which
starts at the middle of the interval.
Proposition 2.

1
c
2
op
T
o
2
1
c
3
Proof. See Appendix B.
Corollary 3. The percentage change in the optimal price due to
changes in the model parameters, except for the purchasing cost
and reservation price, is less than 33.4%.
Proof. The maximal absolute change in p
T
is 2
1
c=3

1
c=2
1
c=6, and the minimal value of p
T
is

1
c=2. Thus, the percentage available change in p
T
satises
the condition

1
c
6
=

1
c
2


1
c
3
1
c
o33:4%
It is obvious that when the gap between the reservation price
and the purchasing cost is small, we expect changes in any of the
model parameters to produce only very small percentage changes
in the optimal price. By Corollary 3 we conclude that even when
the gap between the reservation price and the purchasing cost is
very large, the percentage change in the optimal price cannot
exceed 33.4%, and often it is much lower, as shown in Tables 1 and
2 in Section 7.
6. The optimal replenishment period
According to the previous section, when p
T
is substituted for p
in the objective and the constraint functions of problem (6), the
prot maximization problem is reduced to a single-variable
problem. In this section we provide means of nding numerically
the optimal value of the replenishment period i.e., the value that
maximizes the prot as closely as required.
For the sake of simplicity, we replace T with xE, where x
denotes the normalized replenishment period relative to the
shelf-life of the item, E. Consequently, according to (9), the optimal
prot given x is
p
x


1
c
2

hxE
2
n 1
n 2
1
n
2n 1x
n

_ _
11
and the constraint on x, based on (10), is
xmin 1; p
x
c=hE
_ _
12
The constraint in (12) includes x in both sides of the inequality.
In order to simplify the constraint to the form xx
max
, where x
max
is a constant depending on the problem parameters, let us dene

1
c=hE. is actually the normalized time that zeroes the
maximal potential prot margin of an inventory unit. Proposition
T. Avinadav et al. / Int. J. Production Economics 144 (2013) 497506 500
3 below determines, based on the values of and n, which of the
two components of the upper bound of x in (12) is redundant the
shelf-life duration or positive prot margin and provides an
explicit upper bound for x.
Proposition 3. The constraint x min 1; p
x
c=hE
_ _
is equiva-
lent to xx
max
, where x
max
is determined as follows:
(I) x
max
1 if 3n 7=2n 4.
(II) x
max
if o3n 7=2n 4, where uniquely satises
n 3=n 2 nn 1=2n 2n 1
n

_

over (0,1].
Proof. Substituting the expression for p
x
from (11) in
xp
x
c=hE and using algebraic manipulations, we obtain that
gx , where
gx x
n 3
n 2

nn 1
2n 2n 1x
n

_ _
The function gx is continuous, monotone increasing over (0,1],
so within this interval the following holds:
0 g0ogx g1 3n 7=2n 4:
Hence,
(I) If 3n 7=2n 4 then gx is satised over (0,1], which
means that x p
x
c=hE is redundant (see Fig. 2(a)).
(II) If o3n 7=2n 4 then x 1 is redundant (see Fig. 2(b)).
In this case, gx can be replaced by x , where satises
g . Since gx is monotone increasing over (0,1] then is
unique within this interval and can easily be found using
efcient numerical search techniques, such as the bisection
method (see Burden et al., 1985).
Note that 1:5o3n 7=2n 4 1:75 for n40, so that
x
max
1 if 1:75, and x
max
if 1:5, independently of n.
Now the two-variable maximization problem, (6), can be
written as a single-variable problem:
x
0
1p
x
p
x
c
_ _
1
x
n
n 1
_ _

hxE
2
1
2x
n
n 2
_ _ _ _

K
xE
S:t: xx
max
13
By inserting (1) and (5) in (3), the optimal order quantity given
x is
Q
x

0
1p
x
xE 1
x
n
n 1
_ _
In order to nd the optimal normalized replenishment period,
x, we analyze the prot function. We start the analysis by showing
in Appendix C that

0
x

0
x
2
f x 14
Table 1
Deviation in % from original value in Example 1.
Parameter Change in % in parameter value Inuenced
variable
50 25 10 10 25 50

0
30.0 11.5 4.1 3.5 8.1 14.3 T
n
39.1 18.3 7.1 6.8 16.5 31.8 Q
n
0.5 0.2 0.1 0.1 0.2 0.3 p
n
61.5 31.3 12.6 12.7 31.9 64.3
n
n 16.0 8.1 3.2 3.0 7.3 13.8 T
n
27.0 11.9 4.5 4.1 9.7 17.8 Q
n
0.4 0.2 0.1 0.1 0.2 0.3 p
n
21.1 7.3 2.4 2.0 4.3 7.1
n
20.8 9.4 3.6 3.4 8.4 16.1 T
n
15.0 6.1 2.2 1.9 4.5 7.8 Q
n
92.8 30.9 10.3 8.4 18.5 30.8 p
n
149.7 49.3 16.3 13.3 29.1 48.1
n
c 1.8 0.9 0.4 0.4 0.9 1.9 T
n
1.2 0.6 0.2 0.2 0.6 1.2 Q
n
2.4 1.2 0.5 0.5 1.2 2.4 p
n
6.9 3.4 1.4 1.4 3.4 6.7
n
h 3.3 1.6 0.6 0.6 1.6 3.1 T
n
3.9 1.9 0.8 0.8 1.9 3.8 Q
n
1.0 0.5 0.2 0.2 0.5 1.0 p
n
3.2 1.6 0.6 0.6 1.6 3.1
n
K 23.2 10.3 3.9 3.7 8.8 16.6 T
n
20.1 8.7 3.2 3.0 7.0 12.7 Q
n
0.5 0.2 0.1 0.1 0.2 0.3 p
n
15.0 7.0 2.7 2.6 6.4 12.3
n
E 33.9 15.3 5.8 5.4 19.7 23.5 T
n
37.4 16.9 6.4 5.9 20.0 26.0 Q
n
0.8 0.4 0.1 0.1 0.4 0.5 p
n
19.4 6.7 2.3 1.9 4.0 6.8
n
Table 2
Deviation in % from original value in Example 2.
Parameter Change in % in parameter value Inuenced
variable
50 25 10 10 25 50

0
71.6 23.7 8.0 6.6 14.6 24.7 T
n
31.7 14.2 5.4 5.1 12.2 23.0 Q
n
1.8 0.6 0.2 0.2 0.4 0.7 p
n
77.9 41.6 17.1 17.6 44.9 92.3
n
n 27.5 7.1 2.0 1.3 2.5 2.9 T
n
25.1 11.0 4.1 3.8 9.1 16.8 Q
n
0.5 0.1 0.0 0.0 0.0 0.0 p
n
57.5 25.0 9.2 8.2 18.8 33.3
n
56.5 33.2 15.1 19.5 68.4 Ends in
loss
T
n
19.7 5.3 1.0 0.8 6.3 Q
n
64.0 20.9 6.9 5.4 11.4 p
n
744.7 216.2 66.0 47.5 93.2
n
c 36.7 22.4 10.3 13.2 42.5 Ends in
loss
T
n
7.4 4.7 2.2 2.8 8.4 Q
n
16.8 8.5 3.4 3.5 9.0 p
n
236.9 103.2 37.6 32.7 72.3
n
h 10.9 5.0 1.9 1.8 4.3 8.1 T
n
12.6 5.8 2.2 2.1 5.1 9.7 Q
n
1.3 0.6 0.2 0.2 0.6 1.1 p
n
17.4 8.5 3.3 3.3 8.1 15.7
n
K 38.1 18.4 7.3 7.2 17.8 35.4 T
n
29.1 13.0 4.9 4.6 11.0 20.6 Q
n
1.1 0.5 0.2 0.2 0.5 0.9 p
n
46.2 20.4 7.7 7.1 17.0 31.6
n
E 7.7 2.9 1.0 0.9 2.0 3.4 T
n
23.3 9.2 3.3 2.9 6.6 11.6 Q
n
0.4 0.2 0.1 0.0 0.1 0.2 p
n
33.5 12.6 4.4 3.8 8.6 15.0
n
1 0
2n+4
3n+7
2n+4
3n+7

g(x)
x
1 0

g(x)
x
Fig. 2. (a) The case of 3n 7=2n 4; (b) the case of o3n 7=2n 4.
T. Avinadav et al. / Int. J. Production Economics 144 (2013) 497506 501
where
f x
K

0
E
1p
x

p
x
cnx
n1
n 1

hx
2
E
2
1
2n 1x
n
n 2
_ _ _ _
15
By (14) and the properties of f x, we next show that the prot,
x, is strictly pseudo-concave (and as demonstrated in Example 2,
it is not necessarily concave).
Lemma 2. f x is strictly decreasing over 0; x
max
.
Proof. As proven in Appendix D, the derivative of f x with
respect to x is
f
0
x 1p
x
hE2p
x
0
x1x
n

p
x
chxEnx
n
xp
x
0
1x
n

1
chxE
f
0
x o0 over 0; x
max
since the following three elements are
positive on this interval: hE2p
x
0
(see proof in Appendix E),
p
x
chxE and
1
chxE (which are satised, according to (12)
and Proposition 2, by c hxE p
x
o
1
).
Lemma 3.
(I) The prot function, x, is strictly pseudo-concave over
0; x
max
.
(II) x
max
x
max

0
x
max
.
Proof.
(I) By (14) and Lemma 2,
0
x changes its sign from positive to
negative at most once, so therefore by our claim in Appendix F,
x is strictly pseudo-concave over 0; x
max
.
(II) According to (14) and (15),
K
xE
x
0
x
0
1p
x

p
x
cnx
n
n 1

hxE
2
1
2n 1x
n
n 2
_ _ _ _
Substituting this relation into (13) followed by algebraic
manipulations yields
x
0
1p
x
1x
n
p
x
chxEx
0
x:
By Proposition 3, either x
max
1 or x
max
p
xmax
c=hE,
so that
x
max
x
max

0
x
max

Now we state the main result of this section regarding the

properties of the optimal solution:
Theorem: (I) Problem (13) has a unique local maximum, which
is global, and (II) the inventory system is non-protable if and only
if x
max
0.
Proof: (I) The claim is true by Theorem 3.5.9 and 3.5.12 of
Bazaraa et al. (2006), as x is strictly pseudo-concave according
to Lemma 3. (II) If the inventory system is non-protable then
x 0 over 0; x
max
, and thus x
max
0. For the other direction, if
x
max
0 then by (14), Lemmas 2 and 3,
0
x
0
=x
2
f x

0
=x
2
f x
max

0
x
max
x
max
x
max
0, for all x0; x
max
, so
that x is an increasing function, which is maximized at x
max
.
Therefore, x x
max
0 for all x0; x
max
.
By the Theorem above, a non-protable product can be a priori
detected according to the problem parameters. In such a case and
for the sake of preventing loss, the optimal policy is not to order.
On the other hand, if the product is protable then a simple line-
search algorithm can be used to nd numerically the optimal
replenishment period as closely as necessary. In Appendix G, we
provide a detailed algorithm that is guaranteed to obtain the
optimal pricing and inventory policies efciently.
7. Numerical examples
In this section we present three numerical examples to illus-
trate different behaviors of the prot function, x, and its
derivative,
0
x, driven by different parameter values.
Example 1. 3n 7=2n 4 and x
max
40
Let
0
200; n 2 (for concave decrease of the demand in
time), 0:04; c 12; h 1, K 4000 and E 10. Thus,
9:5; x
max
1 and x
max
2375:5. The optimal solution is
x
n
0:48, which leads to an optimal inventory policy of
T
n
4:8; p
n
53:65 and Q
n
410 that yields
n
3133:3. Fig. 3
describes the prot and its derivative as a function of x.
Example 2. o3n 7=2n 4 and x
max
40
Let
0
200; n 0:5 (for convex decrease of the demand in
time), 0:04; c 12; h 1, K 200 and E 10. Thus,
1:3; x
max
0:79 and x
max
59:45. The optimal solution is
x
n
0:25, which leads to an optimal inventory policy of
T
n
2:5; p
n
19:06 and Q
n
79:33 that yields
n
108:0. Fig. 4
describes the prot and its derivative as a function of x. In this
case, we see that the prot is not a concave function, as its
derivative does not decrease monotonically over (0, 0.79]; how-
ever, the prot is still a strictly pseudo-concave function over the
same interval.
Example 3. o3n 7=2n 4 and x
max
0
Let
0
200; n 1 (for linear decrease of the demand in time),
0:04; c 12; h 1; K 4000 and E 10. Thus, 1:3;
x
max
0:81 and x
max
377:9. The prot is negative for all x,
and the optimal solution is not to order at all. Fig. 5 describes the
prot and its derivative as a function of x.
We now analyze the sensitivity of the optimal replenishment
period, T
n
; the optimal order quantity, Q
n
; the optimal selling
price, p
n
; and the maximal prot,
n
, to changes in the values of
model parameters:
0
, n, , c, h, K and E. Such changes characterize
-10000
-8000
-6000
-4000
-2000
0
2000
4000
x -3000
0
3000
6000
9000
12000
15000
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
x
(x) '(x)
Fig. 3. (x) and '(x) in Example 1.
T. Avinadav et al. / Int. J. Production Economics 144 (2013) 497506 502
a dynamic environment in which numerous elements are subject
to change, including the cost of raw materials, procurement and
delivering the goods; interest rates the rm is charged (which
inuence the unit holding cost); consumer preference (which
inuences consumers' willingness to buy less fresh or more
expensive items); and the technology of packing and storing
(which may inuence the items' shelf-life). We carried out
sensitivity analysis on Examples 1 and 2, the two examples that
resulted in protable optimal pricing and inventory policies. The
deviation in percentage from the original value of each parameter
was measured for six deviations: 710%, 725% and 750%. In
each of the experiments we veried that the constraint xx
max
was satised. The results are summarized in Tables 1 and 2,
respectively.
The sensitivity of the objective function and the decision
variables to changes in each parameter value was dependent on
the values of the other parameters. For one set of parameter values
the objective function and the decision variables were relatively
sensitive to changes in the value of a single parameter, and for the
other set they were relatively not very sensitive. For instance, a
deviation of 50% in the purchasing cost per unit, c, caused only a
6.9% increase in
n
in Example 1, but the same deviation caused a
236.9% increase in Example 2. Increasing the shape parameter n,
which means a more moderate decrease of the demand rate for a
longer initial period, caused Q
n
and
n
to increase, which is
obvious. The direction of the inuence of n on both p
n
and T
n
was not consistent across parameter sets; in any case, however,
the inuence on p
n
was negligible in our examples. Increasing the
full shelf-life of an item, E, resulted in an increase of Q
n
,
n
, p
n
and
T
n
, owing to the negative inuence of perishability on the
demand rate.
In addition, we analyzed the sensitivity of Q
n
, p
n
and
n
to
deviations from the optimal normalized replenishment period, x
n
.
Such a deviation may occur as a result of constraints that require
the supplier to deliver fresh items in a replenishment period that
is shorter or longer than the optimal one. The results for Examples
1 and 2 are summarized in Table 3.
The results in Table 3 reveal that p
n
and
n
are not very sensitive
to deviations up to 725%; however, the deviation in Q
n
is more
sensitive, especially for negative deviations from x
n
.
8. Discussion and conclusions
The novelty of our model is in the formulation of a demand rate
that decreases polynomially over time after replenishment (up to
expiration, where it vanishes) and linearly in the selling price,
where the two factors have a multiplicative effect. We show that a
search for the optimal price, quantity to order and replenishment
period can be reduced to a search for the replenishment period
alone. In addition, we show that the protability of an inventory
system can be tested by computing the prot at one particular
point. A search interval for the optimal replenishment period is
provided, and we prove that the prot per unit time is strictly
pseudo-concave. This property enables us to use a relatively fast-
converging line-search algorithm for nding numerically the
optimal solution as closely as required. Sensitivity analysis of two
numerical examples shows that the sensitivity of the decision
variables to changes in the value of a single parameter is dependent
on the values of the other parameters. The only exception is the
optimal selling price, which is found to be insensitive to changes
-6000
-5000
-4000
-3000
-2000
-1000
0
x 0
1000
2000
3000
4000
5000
6000
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
x
(x) '(x)
Fig. 5. (x) and '(x) in Example 3.
-400
-300
-200
-100
0
100
200
x -200
0
200
400
600
800
1000
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
x
'(x) (x)
Fig. 4. (x) and '(x) in Example 2.
Table 3
Deviation in % from original value in Examples 1 and 2.
Example Deviation from x
n
in % Inuenced variable
50 25 10 10 25 50
1
46.3 21.8 8.4 7.8 18.5 33.1 Q
n
1.0 0.5 0.2 0.2 0.5 0.9 p
n
15.6 2.8 0.4 0.3 1.9 6.5
n
2
40.1 18.2 6.9 6.4 15.1 27.6 Q
n
1.4 0.7 0.3 0.3 0.7 1.3 p
n
29.8 4.6 0.6 0.5 2.4 7.5
n
T. Avinadav et al. / Int. J. Production Economics 144 (2013) 497506 503
of up to 50% in the value of a single parameter. This result can be
explained by Corollary 3, which restricts the maximal change in the
optimal selling price in our model.
In our model, in contrast to previous models of perishable
inventory, the expiration date is not only a constraint on the replen-
ishment period but a factor that inuences the demand over time, and
thus the prots. Current technology may increase shelf-life duration of
products by several means. The model enables us to evaluate whether
the monetary investment in those means is economically justied.
However, in order to calculate the optimal, prot-maximizing replen-
ishment period for a given product, our model requires knowledge of
the shape of the product's demand over time. In practice, to obtain the
value of this parameter, a manager must collect and analyze data on
the consumption behavior associated with the product at several
levels of freshness. The emergence of automated identication and
tracking technologies and network information systems may provide a
solution to this problem. Managers in food and pharmaceutical supply
chains might be able to use technologies such as radio frequency
identication (RFID) and other complementary techniques to track
products freshness as well as real-time consumption.
We encourage extending our model to t a retailer that sells a
variety of perishable products. Though some products have similar
prices and holding costs, each product is probably characterized by a
unique shape of demand over time. Applying the suggested metho-
dology to each one separately results in diverse replenishment
schedules. Such a policy induces high ordering costs, additional
logistical costs, and supplementary use of resources. A better and
probably more economical policy would be to jointly order several
products that are characterized by similar parameters and demand
shapes over time. Future work should investigate the effects of
relaxing some of our assumptions, e.g., allowing a nite replenishment
rate or backlogging, or considering a stochastic demand function.
However, such relaxations require additional assumptions, such as
how demand rate is determined for a product whose units on-shelf
have diverse expiration dates (according to their arrival times during
the non-instantaneous replenishment interval); or how backlogged
demand is inuenced by the time left until the next replenishment.
Since parameters such as demand, lead time and quality deterioration
can uctuate, our approach can be applied as an approximation only
when the uctuations are small. Future research is also required in
order to extend the current methodology to include other price- and
time-dependent demand functions, as well as stochastic expiration
time and demand.
Acknowledgments
The authors thank Professor Mordecai Henig for his useful
comments and helpful suggestions during the work on this paper,
and especially in the eld of pseudo-concavity analysis. The
assistance of the Asian-Pacic editor and two anonymous referees
is graciously acknowledged for suggestions that signicantly
improved this paper.
Appendix A. Bounding the replenishment period by positive
prot margin
By (4),
p; T
T

1
T
2
p; T
T
Tp; T
_ _
where
p; T
T
pchTp; T
By contradiction, if the optimal T satises T 4pc=h and
p; T40 then it also satises p; T=T o0. Such a T cannot
be optimal, proving the lemma.
Appendix B. Bounds on p
T
Let
wT
n 1
n 2
1
n
2n 1T=E
n

_ _
Since wT is a decreasing function of T over 0; E, then
1
4
o
1
2

n 1
n 2
wE wTow0
1
2
Combining this result with (9) yields that

1
c
2

hT
8
op
T
o

1
c
2

hT
4
Since T 40 and, by (10)
T
p
T
c
h
we obtain

1
c
2
op
T
o

1
c
2

p
T
c
4
which is equivalent to

1
c
2
op
T
o
2
1
c
3
Appendix C. The derivative of the prot with respect to x
The derivative of x with respect to x is

0
x
K
x
2
E

0
1p
x

p
x
cnx
n1
n1

hE
2
1
2n1x
n
n2
_ _ _ _

0
p
0
x
2p
x
c1
n 1x
n
n 1

hxE
2

n 22x
n
n 2
_ _
:
By (11)
2p
x
c1
hxE
2

n 1
n 2

n 22x
n
n 1x
n
so that

0
x

0
x
2
K

0
E
1p
x

p
x
cnx
n1
n 1

hx
2
E
2
1
2n 1x
n
n 2
_ _ _ _ _ _
Appendix D. The derivative of f x
The derivative of f x with respect to x is
f
0
x 1p
x
p
x
cnx
n

nx
n1
n1
p
0
x
hxE1n 1x
n

_ _
p
0
x
p
x
cnx
n1
n 1

hx
2
E
2
1
2n 1x
n
n 2
_ _ _ _
Using algebraic manipulations and

1
c2p
x

n 1x
n
n 1
hxE
n 22x
n
2n 2
0
(by (11)), we obtain
f
0
x 1p
x
hE2p
0
x
x1x
n

p
x
chxEnx
n
xp
0
x
1x
n

1
chxE:
T. Avinadav et al. / Int. J. Production Economics 144 (2013) 497506 504
Appendix E. The derivative of p
x
The derivative of p
x
with respect to x is
p
0
x

hE
2

n 1
n 2
1n
n 1 n1x
n
2n 1x
n

2
_ _
Since
n 1 n1x
n
n 1x
n

2

1
n 1x
n

nx
n
n 1x
n

2
is a positive, monotone increasing function of x over (0,1], then p
x
0
is a monotone decreasing function of x over (0,1], and satises
0 p
0
x
x 1 p
0
x
op
0
x
x 0 0:25hE
Thus, hE2p
0
x
40:5hE40 over (0,1].
Appendix F. Condition for pseudo-concavity
Claim. A differentiable real function on an open interval, whose
derivative changes from a positive sign to negative at most once, is
strictly pseudo-concave.
Proof. Let f x be dened on the interval a; b. According to
Denition 3.5.10 of Bazaraa et al. (2006), we have to show that for
each distinct x
1
; x
2
a; b with f
0
x
1
x
2
x
1
0 we get f x
2
of x
1
.
If f
0
x
1
40 then f
0
x
1
x
2
x
1
0 is satised only for x
2
ox
1
, so that
f x
2
of x
1
. If f
0
x
1
o0 then f
0
x
1
x
2
x
1
0 is satised only for
x
2
4x
1
, so that f x
2
of x
1
. If f
0
x
1
0 then x
1
is the unique
maximum point, and f x
2
of x
1
for every x
2
.
Appendix G. An algorithm for obtaining the optimal solution
Step 1: Set problem parameters c;
0
; K; h; E; n; and calculate

1
c=hE.
Step 2: If 3n 7=2n 4 set x
max
1; otherwise, extract
numerically from
n3
n2

nn1
2n2n1
n

_ _
0 (e.g. using the
bisection method with an initial search interval of [0,1]) and
set x
max
.
Step 3: Calculate p
xmax


1
c
2

hxmaxE
2

n1
n2
1
n
2n1xmax
n
_ _
and
x
max

0
1p
xmax
p
xmax
c
_ _
1
xmax
n
n1
_ _

hxmaxE
2
1
2xmax
n
n2
_ _ _ _

K
xmaxE
.
Step 4: If x
max
0 then the inventory system is not protable.
Go to Step 7.
Step 5: Solve f x 0 numerically (e.g. using the bisection
method with an initial search interval of [0,1]) for obtaining
x
n
, where f x
K

0
E
1p
x
_ _
_
p
x
cnx
n1
n1

hx
2
E
2
1
2n1x
n
n2
_ __
and
p
x


1
c
2

hxE
2

n1
n2
1
n
2n1x
n

_ _
.
Step 6: Obtain the optimal policy by setting T
n
x
n
E,
p
n

1
c
2

hx
n
E
2

n1
n2
1
n
2n1x
n

_ _
, and Q
n

0
1p
n

x
n
E 1
x
n

n
n1
_ _
.
Step 7: End.
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