Vol. 0, No. 0, xxxx–xxxx 2014, pp. 1–17 DOI 10.1111/poms.

12209
ISSN 1059-1478|EISSN 1937-5956|14|00|0001 © 2014 Production and Operations Management Society

Managing Perishables with Time and Temperature

History
Michael Ketzenberg
Department of Information and Operations Management, Texas A&M University, College Station, Texas 77843, USA, mketzenberg@tamu.edu

Jacqueline Bloemhof
Department of Logistics, Decision and Information Sciences, Wageningen University, PO Box 8130, 6700 EW, Wageningen,
The Netherlands, Jacqueline.Bloemhof@wur.nl

Gary Gaukler
Peter F. Drucker and Masatoshi Ito Graduate School of Management, Claremont Graduate University, Claremont, California 91711, USA
gary.gaukler@cgu.edu

e address the use and value of time and temperature information to manage perishables in the context of a retailer
W that sells a random lifetime product subject to stochastic demand and lost sales. The product’s lifetime is largely
determined by the temperature history and the flow time through the supply chain. We compare the case in which infor-
mation on flow time and temperature history is available and used for inventory management to a base case in which
such information is not available. We formulate the two cases as Markov Decision Processes and evaluate the value of
information through an extensive simulation using representative, real world supply chain parameters.

Key words: perishable inventory; value of information; RFID; simulation

History: Received: April 2012; Accepted: January 2014 by M. Eric Johnson, after 2 revisions.

ute 56% to total store shrink (Anonymous 2003).

1. Introduction
There appears to be both little doubt and little dis-
agreement that efficient and effective management of
perishables continues to be a priority in the grocery
industry and that this area of management is ripe for
improvement. Enter a simple search on the Internet or
glance through a recent trade publication like Super-
market News for easy confirmation. Perishables not
only represent a large portion of supermarket sales,
but also serve as a means for suppliers to distinguish
themselves from competitors. Perhaps most impor-
tantly, the quality, variety, and availability of perish-
ables have become the principal order winning
criteria for consumers (Axtman 2006, Tortola 2005).
Suppliers have responded by dramatically increasing
the quantity and quality of their product offering in
fresh items.
From an operational perspective, the growth in per-
ishables creates additional challenges. Waste and
spoilage are rampant and on the rise (Boyer 2006,
Tortola 2005). Spoilage is a significant component of
total store shrink, with estimates indicating that
shrink costs an average supermarket approximately
$450,000 per year. While perishable departments
account for only 30% of total store sales, they contrib-
These figures, however, do not address product loss
throughout the supply chain, with some estimates
indicating that as much as 10% of all perishable goods
(fresh produce and other food products) spoil before
they reach consumers (Roberti 2005).
Clearly, the problem for suppliers is how to main-
tain product availability while avoiding excessive
product loss. Furthermore, many perishable food
items have random lifetimes. Most research on per-
ishable inventory management assumes uniform
product decay with respect to time. This assumption
serves to transform shelf life into a measure of age. In
reality, perishable goods are subject to deterioration
that is non-uniform over time because of the signifi-
cant impact of temperature on the quality of perish-
ables. Hence, the random lifetimes we observe in
practice are largely the result of variability in the time
it takes for the product to flow through the supply
chain, as well as the product’s temperature history
(along with other environmental factors like humid-
ity, handling, and lighting). As these factors are gen-
erally unknown and highly variable, there is
considerable uncertainty with regard to product shelf
life. In practice, it is not uncommon for a retailer to
receive inventory from successive orders that spoil

Please Cite this article in press as: Ketzenberg, M., et al. Managing Perishables with Time and Temperature History. Production and
Operations Management (2014), doi 10.1111/poms.12209
 Ketzenberg, Bloemhof, and Gaukler: Managing Perishables with TTH
2 Production and Operations Management 0(0), pp. 1–17, © 2014 Production and Operations Management Society
out of sequence or to receive inventory that arrives
already spoiled. Therefore, effective inventory man-
agement constitutes a challenging task for this class of
item.
Technologies, including radio-frequency identifica-
tion (RFID) chips, data loggers, and time–temperature
integrators that have the ability to track, record, and
transmit the time and temperature history (TTH) of
inventory as it moves through a supply chain have
been available in the marketplace for several years
(Jedermann et al. 2007, Wessel 2008). These technolo-
gies can be employed for:
• accurate shelf life prediction,
• improved issuing policies from warehouses
based on a first-to-expire first-out (FEFO) pol-
icy, rather than a first-in first-out (FIFO) policy,
• identification and correction of food safety
issues,
• dynamic allocation of products based on shelf
life so that a soon-to-expire product is distrib-
uted locally while longer-shelf-life products
can be distributed to more distant locations,
• improved replenishment decisions leading to
less product spoilage and higher profit.
Yet, while several technologies are available that
can provide TTH information, little is known how
that information should be employed in decision
making. Hence, the technology and its capabilities
remain a largely untested promise. Several publica-
tions discuss the potential benefits of RFID (Gaukler
and Seifert 2007) for logistics, transportation, and
warehousing through increased supply chain visibil-
ity. Increased visibility may enable increased effi-
ciency, lower safety stocks, and provide the same or
better service. Moreover, much emphasis has been
placed on the quantification of RFID benefits due to
fewer out of stocks in retail (Gaukler et al. 2007) or on
benefits from supply chain visibility accruing to alter-
nate sourcing options such as expediting and emer-
gency ordering (Gaukler et al. 2008). However, none
of this literature to date has focused on how benefits
from a product’s TTH can be obtained and quantified.
Hence, the focus of our study is on the value and use
of TTH information that is enabled through technolo-
gies like RFID and not the technology itself. For infor-
mation on the technology, we refer the interested
reader to Jedermann et al. (2008) and Wessel (2007).
The general setting we address is a retailer that sells
a random lifetime product under periodic review.
Key assumptions of our model include stochastic
demand, lost sales, orders that may perish out of
sequence, and replenishment that may arrive already
spoiled. To our knowledge, these latter assumptions
have not been addressed in the literature on perish-
able inventory management. We formulate the inven-
Please Cite this article in press as: Ketzenberg, M., et al. Managing Perishables with Time and Temperature History. Production and
Operations Management (2014), doi 10.1111/poms.12209
tory problem as a Markov Decision Process (MDP)
and also develop a heuristic of more practical rele-
vance. We then evaluate the case in which the TTH in
the supply chain can be used to determine product
shelf life by adapting a representative shelf life model
from the food science literature. Finally, we assess the
value of information (VOI) through an extensive sim-
ulation using representative, real-world supply chain
parameters and also assess the impact of information
accuracy.
The VOI is measured as the percentage reduction in
average cost per period obtained with information,
relative to the base case. Our results indicate that the
VOI can be quite significant and is, on average, 43.2%
across experiments, with a mid-range between 32.4%
and 53.8%. Given the notoriously low net margins in
the grocery industry, these results indicate a retailer
may generate significant value from using TTH in
decision making.
The rest of the study is organized as follows. In sec-
tion 2, we position our research with respect to the
literature. In section 3, we define the model and for-
mulate policies for the respective information cases.
Then, in section 4, we introduce and test heuristic pol-
icies and in section 5, we report the results of an exten-
sive simulation study. Finally, we conclude our study
in section 6, and discuss future research directions.
2. Literature Review
Our research intersects several streams of literature
that include value of information, perishable inven-
tory, cold chain management, food safety, tempera-
ture monitoring, RFID, and shelf life prediction.
These streams cut across a wide array of disciplines
that include agribusiness, computing technology,
industrial engineering, technology management, food
science, microbiology, and horticulture. From this
perspective, our study represents a multidisciplinary
contribution to the literature that uniquely ties
together multiple fields of research. Broadly, how-
ever, we can classify the related literature into three
streams: (i) perishable inventory management, (ii)
time and temperature monitoring, and (iii) value of
information for inventory management. Below we
provide an overview of each stream using representa-
tive examples from the literature and position our
research with respect to them.
2.1. Perishable Inventory Management
A major distinction in the literature on perishable
inventory systems is whether the product has a fixed
or random lifetime. Much of the early work focuses
on fixed lifetime problems under periodic review
with seminal work by Nahmias (1975) and Fries
(1975) who were the first to derive and evaluate opti-
Ketzenberg, Bloemhof, and Gaukler: Managing Perishables with TTH
Production and Operations Management 0(0), pp. 1–17, © 2014 Production and Operations Management Society
mal policies for perishable products with lifetimes
greater than two periods. The often cited literature
review by Nahmias (1982) provides an excellent over-
view of this early work. A preponderance of the work
since then has shifted to the analysis of random life-
time models under the assumption of continuous
review and continuous decay. Raafat (1991) provides
a review of the seminal and early work in this area
and it was later followed up by Goyal and Giri (2001).
It is interesting to note that of the 372 contributions
referenced by the three literature reviews, plus those
published since then, we are aware of only one pub-
lished study (Nahmias 1977) and another unpub-
lished working paper (Ketzenberg et al. 2012) that
addresses a perishable product with random lifetime
that is subject to random demand and managed
under periodic review. A more recent review is given
by Karaesmen et al. (2008) on research addressing
perishable products having fixed or random lifetimes.
They classify the literature into periodic and continu-
ous review inventory control. For each category, they
provide a detailed classification regarding the replen-
ishment policy employed, how excess demand is
managed, and lead times assumed.
As we address the VOI for a random lifetime prod-
uct under periodic review in which information
essentially makes the lifetime deterministic, our
research intersects the two areas of fixed and random
lifetimes. However, because we assume a periodic,
discrete time model, the stochastic dynamic program-
ming formulations of the fixed lifetime research are
much more closely related. Indeed, Nahmias (1977),
which is a closely related study to our own, is a direct
extension of Nahmias (1975) that introduces the fixed
lifetime case. He analyzes the problem of a random
lifetime product with stationary stochastic demand,
no fixed order cost, backlogged demand, and where
orders perish in the same sequence that they enter
stock. Because of this latter assumption, FIFO issuing
is optimal, leading Nahmias to prove convexity of the
cost minimizing objective function with respect to the
order quantity. Our analysis here differs considerably
in that unsatisfied demand is lost, product may arrive
already perished, and orders may not perish in
sequence.
Ketzenberg et al. (2012) is a closely related contri-
bution to our own, and like Nahmias (1977) also
address a random lifetime product managed under
periodic review. As in our study here, the random
lifetime is a function of the product’s TTH in the sup-
ply chain. The authors address the decision of setting
an expiration date. Under their modeling assump-
tions, it is possible for orders to perish out of
sequence, to sell inventory that may have already per-
ished, and discard inventory that remains good for
sale. In contrast, our study here is focused on deter-
Please Cite this article in press as: Ketzenberg, M., et al. Managing Perishables with Time and Temperature History. Production and
Operations Management (2014), doi 10.1111/poms.12209
3
mining the VOI for integrating the TTH into the order
policy.
2.2. Time and Temperature Monitoring
Nunes et al. (2006) report that temperature is the
characteristic of the distribution environment that has
the greatest impact on the storage life and safety of
fresh perishables. Most supply chains that support
and facilitate the distribution of perishable products
are broadly split into two parts. The first part, referred
to here as the ambient chain, involves all the process-
ing, handling, and transportation of product prior to
entering the cool chain (constituting the second part
of the supply chain). The ambient chain is not temper-
ature controlled, while the cool chain is temperature
controlled. Common examples are agricultural prod-
ucts, like fruit and vegetables that enter the ambient
chain at the time of harvest. These products then wait
to be transported to a distribution point where they
are loaded onto refrigerated trucks headed to market.
At “cool” temperatures, temperature control inhib-
its the growth of microbiological agents that cause
product decay and hence extends product shelf life.
Even in the cool chain, however, temperature control
is not absolute. Rodriguez-Bermejo et al. (2007) and
Moureh and Flick (2004) provide empirical measures
of temperature variability for a set of containers.
Moreover, studies show that time–temperature vari-
ability has a direct impact on product shelf life. See
Doyle (1995) and Taoukis et al. (1999) as representa-
tive examples. Koutsoumanis et al. (2005) demon-
strates variations in temperature such that even items
transported in the same container may have different
remaining shelf lives once they make it to market. As
Koutsoumanis et al. (2005) state:
Since in practice significant deviations from
specified conditions often occur, temperature
monitoring and recording is a prerequisite for
chain control and any logistics management sys-
tem that aims on product quality optimization
at the consumer’s end.
Accurate shelf life prediction is a goal of time–tem-
perature monitoring through RFID and similar tech-
nologies. There has been significant research towards
this end. In the scientific literature there are several
models to predict shelf life (e.g., Taoukis et al. 1999,
Tijskens and Polderdijk 1996), most of which are
based on the Arrhenius law dating back to Chang
(1981). The law of Arrhenius (1896) describes the
quality decay for reaction kinetics. These models vary
in the level of their predictive accuracy. Hence, while
we evaluate the value of perfect information in order
to understand the determinants of value and the
 Ketzenberg, Bloemhof, and Gaukler: Managing Perishables with TTH
4 Production and Operations Management 0(0), pp. 1–17, © 2014 Production and Operations Management Society
conditions in which information is most valuable, we
also address the impact of errors on the VOI.
We note that the research stream that develops pre-
dictive models for shelf life does not address how the
information should be used for inventory manage-
ment. This latter research generally falls within the
stream of research on the VOI for inventory manage-
ment.
2.3. Value of Information for Inventory
Management
There are a few fairly recent contributions that pro-
vide literature reviews and taxonomies on the VOI for
inventory management. Sahin and Robinson (2002)
and Huang et al. (2003) are representative examples
providing a very broad overview of the literature.
Ketzenberg et al. (2007), in addition to providing an
extensive literature review, develops and tests a
framework using the collective studies on the VOI in
the literature. These literature reviews indicate that a
preponderance of research in this area focuses on the
value of demand information to improve supply
chain performance. Gavirneni et al. (1999) and Moin-
zadeh (2002) are representative examples.
A few studies explore the value of supply informa-
tion. Some of these consider cases where information,
such as production yield, available supplier capacity,
and lead-time, is shared forward in the supply chain
so that customers can reduce supply uncertainty
(Altug and Muharremoglu 2011, Chen and Chen
2005, Choi et al. 2008, Van der Duyn Schouten et al.
1994). Another form of supply uncertainty arises in
closed loop supply chains, where there may be uncer-
tainty with regard to the quantity, quality, and timing
of product returns. Ferrer and Ketzenberg (2004) eval-
uate the value of yield information in the context of
remanufacturing. Ketzenberg et al. (2006) later extend
the literature by examining the VOI to explain differ-
ent sources of uncertainty that include demand,
return, as well as remanufacturing yield. They
observe that no type of information dominates in
terms of value and the value can be quite substantial,
even with imperfect information.
Product perishability represents another source of
supply uncertainty. We are aware of only a few stud-
ies that address the VOI for a perishable product and
most of these are studies that compare the perfor-
mance of different issuing policies which are enabled
by knowing a product’s TTH and include Dada and
Thiesse (2008), Koutsoumanis et al. (2005), and Taou-
kis et al. (1999). These contributions do not, however,
address the VOI for the replenishment decision as we
do.
Ketzenberg and Ferguson (2008) is a closely related
study that evaluates the VOI in the context of a serial
supply chain that supplies a product with a fixed life-
Please Cite this article in press as: Ketzenberg, M., et al. Managing Perishables with Time and Temperature History. Production and
Operations Management (2014), doi 10.1111/poms.12209
time. They examine the case in which a retailer shares
its demand and inventory information with a supplier
and another case in which full information at both
echelons is known to a centralized decision maker.
Unlike the majority of contributions where the VOI
and value of centralized control are often small in the
context of non-perishable serial supply chains, they
show significantly larger benefits due to the ability of
the supplier to provide a fresher product.
In an earlier study, Ferguson and Ketzenberg (2006)
examine the VOI for a retailer that sells a perishable
product with a fixed lifetime (expiration date),
although the remaining lifetime may vary from
replenishment to replenishment. In contrast, we
address a perishable product with a random lifetime.
This situation is inherently more uncertain as (i) the
timing of when a product perishes is unknown, (ii)
successive orders may perish out of sequence, and
(iii) replenishment may arrive in an already perished
state. In fact, we adapt the base case policy introduced
in Ferguson and Ketzenberg (2006) for our RFID
information case here.
From a holistic perspective, research has been con-
ducted that demonstrates (i) the wide fluctuations in
a supply chain’s TTH, (ii) the applicability and accu-
racy of using RFID temperature tags to capture the
TTH, and (iii) the use of TTH to model shelf life.
However, there has been no research of which we are
aware that addresses the value of this information for
inventory replenishment decisions. In the next sec-
tion, we introduce our model.
3. Model
The general setting involves a retailer that sells a per-
ishable product and receives replenishment from an
exogenous supplier. The product lifetime is random
and can be described by a discrete distribution, with a
maximum shelf life of M periods. We assume the
product has constant utility throughout its shelf life.
Once the product perishes, it can no longer be sold
and must be outdated (discarded). The decision of
interest for the retailer is the quantity of new product
qt to order from the supplier in period t.
The order of events for the retailer in each period is
(i) place replenishment order if necessary, (ii) realize
demand, (iii) receive replenishment, and (iv) remove
any perished units from inventory (outdate). Demand
is discrete, stochastic, and stationary over time, with
mean ld, probability mass function (pmf) /(
), and
coefficient of variation Cd (SD divided by the mean).
Additionally, let dt denote the demand realization in
period t. We assume unsatisfied demand is lost, with
a penalty p for each unit of lost sales. A holding cost
per period h is assessed on each unit of inventory,
after replenishment but before outdating.
Ketzenberg, Bloemhof, and Gaukler: Managing Perishables with TTH
Production and Operations Management 0(0), pp. 1–17, © 2014 Production and Operations Management Society
To keep the problem tractable, we assume a per-
fectly reliable source of supply (no shortages). For the
actual lead time of an order, we assume that any
replenishment ordered at the beginning of a period
arrives just prior to the end of that same period, pro-
viding an effective lead time of one period. This
assumption is reasonable in supply chains of perish-
able products. The first part of the agricultural supply
chains operates as a push chain, in which farmers put
their products on the market to be transported glob-
ally to distant warehouses (e.g., from Latin America
to European harbors by ship in containers). From this
point in the chain, the agricultural supply chain is a
pull chain, driven by orders and, as such, the ware-
houses serve as customer order decoupling points
(Wikner and Rudberg 2005). Our problem setting is at
the retail store that is ordering from these large ware-
houses and these warehouses serve hundreds of con-
siderably smaller retailers, providing a high level of
service. From this perspective, the assumption of no
shortages and a one period lead-time is reasonable.
As the product is perishable, inventory may be com-
posed of units with different shelf lives. The inventory
age class x is the number of periods elapsed since
replenishment arrived, where x = 0,1,. . .,M. The spe-
cial case of age class zero refers to newly replenished
items that have not yet been placed in inventory. Let
ix,t denote the quantity of age class x inventory at the
start of period t, with ~it ¼ ½i1;t ; i2;t ;P
. . .; iM;t  and define
M
the aggregate inventory level It ¼ x¼1 ix;t .
We assume all units of the same age class (those
units ordered and received together) perish at the
same time. Furthermore, product that has spent a
short time in inventory may perish prior to product
that has spent a longer time in inventory. Note that
even new replenishment qt may arrive already per-
ished (e.g., due to temperature abuse). We assume
that the retailer is credited in this case so that no out-
dating costs apply for any replenishment arriving
already perished. All other units that perish incur an
outdating cost c per unit. This outdating cost may
generally be interpreted as the purchase cost of the
product, plus some disposal cost. Generally, we
assume it is not cost effective (or profitable) to pur-
posely hold inventory until it perishes so that c ≥ 0.
Let yx,t 2 {0,1}, be an indicator function that identi-
fies whether (yx,t = 0) or not (yx,t = 1) all of the inven-
tory remaining in age class x,x 2 (0,1,. . .,M) at the
end of period t perishes. Further, let sx(yx,t) denote the
probability of observing yx,t. Given a maximum life-
time of M periods, then sM(0) = 1,sM(1) = 0 and by
definition sx(1) = 1sx(0) for all x. Next, we derive
sx(0) for all 0 ≤ x ≤ M  1.
First, let w(x) and Ψ(x) denote the pmf and cumula-
tive distribution function (cdf), respectively, for the
remaining shelf life of units in a replenishment order
Please Cite this article in press as: Ketzenberg, M., et al. Managing Perishables with Time and Temperature History. Production and
Operations Management (2014), doi 10.1111/poms.12209
5
that arrives in a period, measured as the number of
periods until the units perish. For now, we take the
shelf life distribution as given; we will later show in
section 5 how to derive this distribution for specific
products and supply chains. We assume that the shelf
life of the items from one replenishment order to the
next are independent and identically distributed (iid)
random variables. Then,
(
wðxÞ x ¼ 0;
sx ð0Þ ¼ wðxÞ
1Wðx1Þ x ¼ 1; . . .; M:
Now let ~ yt ¼ ½y1;t ; y2;t ; . . .; yM;t . Note that the joint
probability associated with product perishing (or not)
~t Þ, where
across ageQ classes 1,2,. . .,M is given by gðy
gðy~t Þ ¼ M x¼1 s x ðy x;t Þ. As, in some cases, we are also
interested in the joint probability for all age classes,
inclusive of age class zero, weQ also introduce
~0
y t ¼ ½y0;t ; y1;t ; . . .; yM;t  and g0ðy~0t Þ ¼ M x¼0 sx ðyx;t Þ.
Now let wx;t  wx;t ði~t; dt ; yx;t Þ denote the quantity of
inventory in age class x,x 2 (1,2,. . .,M) that perishes
at the end of period t. For ease of exposition, let
z+  {{max}}(z,0). Then,
 P
½ix;t  ðdt  M þ þ
wx;t ¼ j¼xþ1 ij;t Þ  yx;t ¼ 0;
ð1Þ
0 yx;t ¼ 1:
Hence, once demand is realized, any subsequent
realization for ~ yt will determine the quantities wx,t for
1 ≤ x ≤ M as specified in Equation (1). Note that as
inventory is issued on a FIFO basis, only if demand is
less than the sum of inventory in age class x, plus all
the older age classes, inventory in age class x may per-
ish. Consider the following illustrative example.
Assume that M = 3, ~ it ¼ ½5; 3; 1, dt = 2, and
~
yt ¼ ½1; 0; 1. In this case, the single unit of age class
three inventory is sold, along with one of the three
units of age class two inventory. The remaining two
units of age class two inventory perish at the end of
the period, while the five units of age class one do not
perish. Hence,Pw1,t = 0, w2,t = 2, and w3,t = 0. Let
Wt ði~t; dt ; ~Þ
yt ¼ M
x¼1 wx;t denote the total sum of
inventory that perishes in period t, excluding any
replenished items that may have arrived already
perished. Our principal notation is summarized in
Table 1.
3.1. Base Case Optimization
We formulate the replenishment problem as an MDP
where the objective is to find the retailer’s optimal
replenishment policy so that its long-run average
expected cost per period is minimized. The linkage
between periods is captured through the one-period
transfer function of the retailer’s age-dependent
inventory. Starting inventory ~
it depends on the prior
period’s starting inventory ~it1 , demand dt1,
 Ketzenberg, Bloemhof, and Gaukler: Managing Perishables with TTH
6 Production and Operations Management 0(0), pp. 1–17, © 2014 Production and Operations Management Society

X
LB ði~Þ ¼ p ðd  IÞþ
/ðdÞ
Table 1 Model Notation

Symbol Definition d
XX ð2Þ
M Maximum product lifetime þh ððI  dÞþ ÞÞ
gðy
~Þ
/ðdÞ:
t Period d ~
y
qt Order quantity in period t
ld Mean demand Note that Equation (2) does not include the holding
/(
) pmf of demand
cost on any new replenishment q, which we treat sep-
Cd Coefficient of variation in demand
dt Realized demand in period t arately. This enables a more direct comparison to heu-
h Unit holding cost ristics we later develop.
p Unit penalty cost for lost sales Given the vector of starting inventory ~i and an
ix,t Quantity of inventory that has been held in order quantity q, the infinite horizon cost-to-go, if
~
inventory x periods
future periods behave optimally, is gB ðq;~iÞ. The opti-
it Vector of inventory quantities for age classes
one through M mal cost-to-go that results is f B ði~Þ. We can explicitly
It Aggregate inventory level write the infinite horizon recursion as
c Unit outdating cost
yx,t Indicator function identifying if inventory in age gB ðq;~iÞ ¼h
q
s0 ð1Þ þ LB ði~Þ
class x perishes at the end of period t XX
~ ~0t )
yt ,(y Vector of indicator functions for age classes
þc Wði~; d; ~Þ ~Þ
/ðdÞ
y
gðy
one through M (zero through M) d ~
y ð3Þ
XX
sx(yx,t) Probability of observing yx,t þ f ðsði~; d; q; ~0ÞÞ
B
~0Þ
/ðdÞ
y
g0ðy
gðy
~t Þ; ðg0ðy
~0t ÞÞ Joint probability of observing ~ ~0t )
yt (y
d ~0
y
w(x),Ψ(x) pmf and cdf (respectively) for the remaining
shelf life of units in a replenishment order
wx,t Quantity of units in age class x that perish
and
at the end of period t
Wt Aggregate quantity of units that perish f B ði~Þ ¼ min gB ðq;~iÞ: ð4Þ
q0
at the end of period t

This formulation is similar to the approaches fol-

replenishment quantity qt1, and spoilage indicators lowed by Fries (1975), Nandakumar and Morton
y t1 . Letting sði~t1 ; dt1 ; qt1 ; ~0
~0 y t1 Þ denote the one-per- (1993), and Ketzenberg et al. (2006), where now the
iod transfer function, then ~it ¼ sði~t1 ; dt1 ; qt1 ; ~0 y t1 Þ. product shelf life is modeled as a random variable.
Assuming FIFO issuing, we have The state space is defined by the vector of age-depen-

( PM þ þ
½ix1;t1  ðdt1  j¼x ij;t1 Þ 
yx1;t1 x ¼ 2; . . .; M;
ix;t ¼
qt1
y0;t1 x ¼ 1:

Consequently, inventory at the start of period t
of age class x equals the inventory at the start of
period t  1 of age class x  1, minus the
demand in period t  1 which is not satisfied by
units from older age classes, minus the perished
items in period t  1 for age class x  1. If an
order was placed in period t  1 then the inven-
tory in period t of age class 1 is the amount of
replenishment qt1 minus the perished items of
that replenishment. As an example, if ~it1 ¼
½3; 6; 2; 1; dt1 ¼ 7; qt1 ¼ 5, and ~0
y t1 ¼ ½1; 0; 1; 1; 1,
then ~it ¼ ½5; 0; 2; 0.
From here forward, we suppress the subscript t
when the context is clear. Let the superscript B denote
the base case which assumes that RFID information is
not available. Given starting inventory ~i, the one-per-
iod loss function that is composed of the penalty cost
for unsatisfied demand and holding cost on ending
inventory is given by LB ð~i Þ where,
dent starting inventory. The right-hand-side of Equa-
tion (3) computes expected total cost which consists
of four terms: (i) the holding cost on the quantity of
newly replenished items, (ii) the one-period loss func-
tion, (iii) outdating cost on the quantity of perished
product, and (iv) future expected cost. The decision
space for q is restricted to the set of non-negative inte-
ger values. As the state space and decision spaces are
discrete and countable and the total cost related to
inventory is bounded, there exists an optimal station-
ary policy that does not randomize (Puterman 1994,
pp. 102–111).
We can show the following:
PROPOSITION 1. The infinite horizon cost gB is convex in
q, given inventory age vectors i2,. . .,iM.
PROOF. See the electronic companion. h

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X
The reorder policy expressed in Equations (3) and gR ðq;~iÞ ¼h
q
s0 ð1Þ þ LR ði~Þ þ c ði1  dÞþ
/ðdÞ
(4) enables exact analysis and computation of an opti- d
mal solution. Due to the preceding convexity result, XX
þ f ðsði~; d; q; aÞÞ
wðaÞ
/ðdÞ
R
an efficient search method can be employed to find d a
the optimal q*. Even so, because the state space
ð5Þ
expands exponentially with the size of the age-depen-
dent vector of starting inventory, only small sized and
problems can be solved numerically. Nevertheless,
the optimal base case policy, and the optimal RFID f R ði~Þ ¼ min gR ðq;~iÞ: ð6Þ
q0
policy, that we introduce next, serve two important
purposes. First, they provide a structure from which
The state and decision spaces remain the same in
we develop heuristic policies to evaluate the VOI and
Equation (6) as they are in Equation (4). The expecta-
that are more practical to implement. Second, the
tion of cost on the right-hand-side of Equation (5) is
optimal policies provide a means to assess the perfor-
now taken with respect to demand and the remaining
mance of the heuristics.
shelf life of items in a replenishment order. Any
inventory with a shelf life remaining of one-period
3.2. RFID Case Optimization
that are not used to satisfy demand perish, along with
With RFID enabled information the retailer knows the
any newly replenished items that may have already
TTH of newly replenished items and therefore their
perished (a = 0).
remaining shelf life as well. Hence, while there
We can show the following:
remains uncertainty with regard to the shelf life of
items in a replenishment order when the order is
PROPOSITION 2. The infinite horizon cost gR is convex in
placed, there is no uncertainty with regard to when
q for given remaining lifetimes at, if at > 1.
inventory perishes once the items are received. We
now change the interpretation of our state variable ~i
to keep track of remaining shelf life, as opposed to the
PROOF. See the electronic companion. h
elapsed days on the shelf in the base case. Formally,
let ix now denote the quantity of on-hand beginning
The RFID replenishment policy is considerably less
inventory with a remaining shelf life of x periods,
complex than the base case replenishment policy. By
where 1 ≤ x ≤ M. Inventory is now issued on a FEFO
eliminating the uncertainty with regard to when
basis. Letting at, 0 ≤ at ≤ M denote the remaining
inventory perishes, it is no longer necessary to evalu-
lifetime of items in a replenishment order received
ate all the possible permutations for product expira-
in period t, then the one-period transfer function
tion across age classes. Even so, the feasibility for
for starting inventory is now given by ~ it ¼
obtaining numerical solutions remains constrained to
sði~t1 ; dt1 ; qt1 ; at1 Þ where
small sized problems. To address this issue, we pro-
( P ceed in the next section to introduce heuristic policies
½ixþ1;t1  ðdt1  xj¼1 ij;t1 Þþ þ x 6¼ at1 ;
ix;t ¼ P that are not so limited.
½ixþ1;t1  ðdt1  xj¼1 ij;t1 Þþ þ þ qt1 x ¼ at1

Just as in the base case, we formulate the RFID
replenishment problem as an MDP where the objec-
tive is to find the retailer’s optimal replenishment pol-
icy so that its long-run average per period expected
cost is minimized. We adapt the policy introduced in
Ferguson and Ketzenberg (2006, equation 2) for our
purposes here. Let the superscript R represent the
RFID enabled information case. For this case, the one-
period loss function is given by LR ði~Þ where
X XX
LR ði~Þ ¼ p ðd  IÞþ
/ðdÞ þ h ðI  maxði1 ; dÞÞþ
d d ~
y mance. As a retailer can place an order each day,

/ðdÞ:
We can explicitly write the infinite horizon recur-
sion as
4. Heuristics
In this section, we introduce and test heuristics that
are practical to implement, extremely accurate, and
enable a broad evaluation on the VOI. We first
define our heuristic policies for each information
case and then demonstrate their performance rela-
tive to the optimal policies introduced in the prior
section.
The structure of the heuristic policies is taken
directly from the structure of the MDPs and is pred-
icated on a balance between simplicity and perfor-
without batch ordering restrictions or a fixed order
cost, and can receive replenishment with an effec-
tive one period lead time, our heuristics represent
myopic policies where the order decision rests

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principally on whether sufficient stock exists in the
current period that will carry over and minimize
the next period’s expected penalty and holding
costs (if so, the decision is delayed to the next per-
iod). We use the term principally because there are
two additional costs to be considered. First, there is
an opportunity cost for not ordering additional
inventory in the current period because future
orders may arrive already perished. We refer to the
additional inventory as safety stock, as it essentially
serves as a hedge against supply uncertainty. Sec-
ond, items in a replenishment order may outdate as
opposed to being used to satisfy demand and hence
it is necessary to account for the associated cost, as
larger replenishment orders will be associated with
higher outdating costs.
We also note that even with the considerably sim-
plified heuristics we develop here, they remain
quite complex and are cumbersome from the stand-
point of tracking the age of inventory. That is, the
replenishment decisions that arise from the heuris-
tics are predicated on the full age-dependent vector
8 PqþI
>
> c
>
< P P
OBx ðq;~iÞ ¼ þ y Oxþ1 ðq
~
B
>
>
d
>
: Pq
of starting inventory ~it, such that the order quantity
in a period in which there are 100 units of five-day-
old product may be different from the case when
there are 100 units of two-day-old product. It is of
some interest therefore to consider the value of sim-
ply keeping track of all the age-related information
in the first place. Perhaps an aggregate policy that
is predicated solely on the total count of units in
inventory is sufficient. We consider such a policy a
naive policy. In section 4.4, we define such a policy
and compare its performance to that of the base
case heuristic. We now begin by defining the base
case heuristic.
4.1. Base Case Heuristic
The base case heuristic comprises four cost compo-
nents of which two are taken directly from the opti-
mal policy as expressed in Equation (3). The objective
is to make a replenishment decision that minimizes
the sum of these four cost components that include:
(1) the cost of holding inventory purchased in the
current period used to satisfy future demand,
(2) next period expected penalty and holding
cost,
(3) expected future outdating cost associated with
items in a replenishment order, and
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(4) the cost associated with items in a replenish-
ment order arriving already expired.
The first cost component is the same as the first
term of Equation (3), namely, h
q
s0(1). The second
cost component is captured by the one-period loss
function LB ði~Þ. As we are interested in minimizing the
expected penalty and holding costs in the next period
(t+1), based on inventory and order quantity in the
current period (t), the associated costs are given by
XX
LB ðsði~; d; q; ~0ÞÞ ~0Þ
/ðdÞ:
y
g0ðy
d ~0
y
As the other cost components, like the one-period
loss function, are also present in the RFID case heuris-
tic, we use the superscripts B and R to distinguish
between the two cases. The third component, denoted
by OB1 ðq;~iÞ is the future expected outdating cost asso-
ciated with a replenishment order q in the current per-
iod. OB1 ðq;~iÞ is defined recursively, as the expectation
is taken over the M-period maximum shelf life.
Define
d¼0 ðq  ðd  IÞþ Þþ
/ðdÞ
sx ð0Þ;

yx  ðd  IÞþ Þþ ; sði~; d; 0; ~ÞÞ ~Þ 1  x\M  1;
y
/ðdÞ
gðy ð7Þ
c d¼0 ðq  dÞ
/ðdÞ x ¼ M:
As with LB ði~Þ, as the outdating cost is predicated on
both the replenishment quantity and the vector of
aged inventory that transfers into the next period, the
associated cost is given by
XX
OB1 ðq; sði~; d; 0; ~ÞÞ ~Þ
/ðdÞ
s0 ð1Þ:
y
gðy
d ~
y
The final cost component is designed to accommo-
date the costs associated with a realization of (i) plac-
ing an order in period t + 1 and (ii) having the
corresponding replenishment quantity arrive already
perished. While we do not have an exact expression
for the associated costs, we develop an approximation
that is predicated on the penalty cost for unsatisfied
demand in period t + 2 that arises solely based on
inventory carried over from period t. In essence, we
may want to order more in period t to hedge against
perished inventory arriving in period t + 1. The
expected one-period penalty costs for unsatisfied
demand in period t + 2 are denoted by P(It+2) where
X
PðItþ2 Þ ¼ p ðd  Itþ2 Þþ
/ðdÞ:
d
As the cost expressed by P(It+2) arises from inven-
tory carried over into period t + 2, ordering more
Ketzenberg, Bloemhof, and Gaukler: Managing Perishables with TTH
Production and Operations Management 0(0), pp. 1–17, © 2014 Production and Operations Management Society
inventory in period t will help reduce this cost. Even
so, the amount of inventory carried over will depend
on the demand that is realized and the inventory that
perishes in period t and period t + 1. Hence, we
require an expression that will properly account for
the associated quantities and their probabilities. We
begin with an expression that accounts for period
t + 1. Let N B ði~tþ1 Þ denote the expected penalty costs
that arise in period t + 2, given starting inventory of
~itþ1 so that
XX
N B ði~tþ1 Þ ¼ PððItþ1  dÞþ  WÞ
gðy
~Þ
/ðdÞ:
d ~
y
From here, the expression for the cost of unsatisfied
demand in period t + 2, given starting inventory of ~i
and an order quantity of q in period t can be stated as
XX
N B ðsði~; d; q; ~0ÞÞ ~0Þ
/ðdÞ:
y
g0ðy ð8Þ
d ~0
y
Now, this last cost component occurs only a
fraction of the time, corresponding to the fraction
of periods in which items in a replenishment
order arrive already perished. Hence, we do not
fully load the cost associated with Equation (8)
into our heuristic’s cost minimizing objective func-
tion. Instead, we weight the expression by s0(0) as
that denotes the probability associated with receiv-
ing items that have already perished. Letting the
superscript HB denote the base case heuristic, the
cost minimizing objective function is given by
f HB ði~Þ where
XX
f HB ði~Þ¼min h
q
so ð1Þþ LB ðsði~;d;q;y
~0ÞÞ
g0ðy
~0Þ
/ðdÞ
q0
~0
d y
XX
þ OB1 ðq;sði~;d;0;y
~ÞÞ
gðy
~Þ
/ðdÞ
s0 ð1Þ
d
XX
~
y 1 X
þ N B ðsði~;d;q;y
~0ÞÞ
g0ðy
~0Þ
/ðdÞ:
d ~0
y
Note that the four terms on the right-hand-side of
Equation (9) correspond to each of the four cost com-
ponents that have been defined.
The RFID case heuristic conforms to the same
structure as the base case heuristic, although
minor changes are made to accommodate the
additional information available in this case, as we
discuss next.
4.2. RFID Case Heuristic
With RFID enabled information, the remaining shelf
life of replenished items is known and this informa-
tion is incorporated into the heuristic. Outside of the
first cost component, each of the other three cost com-
ponents introduced with the base case heuristic
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require modifications to account for the reduction in
uncertainty for this case.
First, the one-period loss function is now given
by LR ði~Þ as opposed to LB ði~Þ. Second, as the timing
of when inventory perishes is no longer uncertain
and inventory is issued on a FEFO basis, the out-
dating cost expression is greatly simplified and is
no longer recursive as in the base case heuristic.
Here our expectation of the outdating cost is given
by ORa ðq;~iÞ where
X
q X
a
ORa ðq;~iÞ ¼ c ðq  ðd  ix Þþ Þþ
/a ðdÞ;
d¼0 x¼1
where /a(d) denotes the a-fold convolution of
demand. Note that ORa ðq;~iÞ is approximate as it does
not consider the units of current inventory that may
perish prior to those units in the replenishment
order.
Finally, N R ði~tþ1 Þ, the expected penalty costs that
arise in period t+2, given starting inventory of ~itþ1 in
period t + 1 is given by
X
N R ði~tþ1 Þ ¼ PðItþ1  maxðd; i1;tþ1 ÞÞþ
/ðdÞ:
d
Now, letting the superscript HR denote the RFID
case heuristic policy, the objective function is given
by f HR ði~Þ where
f HR ði~Þ ¼ min h
q
so ð1Þ
q0
1 X
X M
þ LR ðsði~; d; q; aÞÞ
wðaÞ
/ðdÞ
d¼0 a¼0
1 X
X M
ORa ðq; sði~; d; 0; aÞÞ
wðaÞ
/ðdÞ
þ
d¼0 a¼1
X M
ð9Þ þ N R ðsði~; d; q; aÞÞ
wðaÞ
/ðdÞ
so ð0Þ:
d¼0 a¼0
ð10Þ
4.3. Validation of Heuristic Performance
We test the heuristics by comparing their perfor-
mance to optimality for a variety of scenarios.
Demand /(
) corresponds to a truncated negative
binomial distribution with mean demand of five and
a maximum value of 50 (the insignificant probabilities
for values exceeding 50 are nevertheless redistributed
proportionately within the truncated limit of the dis-
tribution). See Agrawal and Smith (1996) regarding
the advantages of assuming negative binomial distri-
butions for retail demand. For our computational
study, we evaluate maximum product lifetimes of
M 2 (2,3,4,5) days, although the realized lifetime
 Ketzenberg, Bloemhof, and Gaukler: Managing Perishables with TTH
10 Production and Operations Management 0(0), pp. 1–17, © 2014 Production and Operations Management Society

Table 2 Age Distributions Table 3 Heuristic Performance

Maximum life (M) Mean life w(0) w(1) w(2) w(3) w(4) w(5) Base case RFID case
2 1.0 0.10 0.80 0.10 Parameter Value heuristic (%) heuristic (%)
1.4 0.10 0.40 0.50 Maximum 2 0.05 0.06
1.7 0.05 0.20 0.75 shelf life (M) 3 0.10 0.11
3 1.5 0.10 0.40 0.40 0.10 4 0.10 0.43
1.8 0.10 0.20 0.50 0.20 5 0.13 0.85
2.3 0.05 0.15 0.30 0.50 Demand CV (Cd) 0.45 0.16 0.44
4 2.0 0.10 0.15 0.30 0.50 0.60 0.07 0.33
2.4 0.10 0.20 0.40 0.20 0.10 0.75 0.06 0.32
2.7 0.10 0.15 0.20 0.40 0.15 Penalty cost (p) 2.5 0.13 0.29
5 2.5 0.10 0.15 0.25 0.25 0.15 0.1 5.0 0.07 0.41
2.7 0.10 0.10 0.20 0.30 0.20 0.1 10.0 0.09 0.39
3.0 0.05 0.10 0.20 0.25 0.30 0.1 Outdating cost (c) 5 0.10 0.50
10 0.09 0.38
15 0.10 0.22

varies according to w(
). We explore a variety of distri-

butions that are specified in Table 2 for each M.
We consider a set of experiments that comprise a
factorial design for all combinations of the following
parameter values of outdating costs, penalty costs
and the demand coefficient of variation (Demand
CV): c 2 ($5, $10, $15), p 2 ($2.5, $5, $10), and
Cd 2 (0.45, 0.60, 0.75). We keep the holding cost con-
stant at a penny per unit (as periods are days, the
holding cost is trivial).
Our selection of values is chosen to test the robust-
ness of the heuristics over widely varying operating
cost environments. Even so, the range of certain
parameter values, most notably for M, is constrained
due to the inability to solve the MDPs for large values
—our principal motivation for developing the heuris-
tics in the first place.
We duplicate the factorial design for each M and w(
).
Hence, there are a total of 324 experiments in our
test. We use value iteration to compute the average
expected cost for the respective optimal policies. For
the heuristics, we solve the heuristic decision for
each state and then, using the state transition proba-
bilities, solve for the long-run average cost.
Overall, the heuristics perform very well. The base
case heuristic achieves, on average, an expected cost
that is 0.1% greater than optimal and a worst case cost
that is 1.5% greater than optimal. The RFID case heu-
ristic demonstrates similar performance with an aver-
age expected cost that is 0.4% greater than optimal
and a worst case cost that is 1.8% greater than opti-
mal. We also conducted a sensitivity analysis to eval-
uate how heuristic performance responds to changes
in the parameter values and we report these results in
Table 3. Both heuristics are fairly insensitive to
changes in the parameters. Notably, the RFID case
heuristic performance does nominally degrade as the
maximum shelf life increases. From the perspective of
evaluating the VOI in larger sized problems where
the retail shelf life can be as long as ten days, our
results will provide a conservative assessment. Before
we do so, however, we introduce and evaluate the
performance of a naı̈ve policy.
4.4. Naı̈ve Policy
Here we introduce a naı̈ve policy and compare its
performance to the base case heuristic. Our naı̈ve pol-
icy is one that ignores the age-dependent vector of
starting inventory and instead, simply considers the
aggregate quantity of inventory in making a replen-
ishment decision. Such a policy is a far simpler policy
to implement, but comes at the potential expense of
ignoring information. As the retailer can order each
period, without a fixed ordering cost, we choose a
base stock policy as our naı̈ve policy. Moreover, we
choose the best performing target inventory level for
our policy. That is, we search over all possible values
for the target inventory level and select the one that
achieves the lowest average total cost per period for
any given set of parameter values. Letting S denote
the chosen target inventory level, then the naı̈ve pol-
icy will order qt units in period t where qt = S  It.
Using the same 324 experiments used in the prior
section to validate heuristic performance, we compare
the performance of the naı̈ve policy with that of the
optimal base case policy and report the results in
Table 4. Clearly, aggregating inventory and ignoring
the age-related information results in worse perfor-
mance. The degree of degradation, however, is related
to the assumptions associated with perishability. Con-
sider that the relative performance of the naı̈ve policy
improves as the outdating cost decreases and gener-
ally as the maximum product shelf life M increases.
Note that, as M increases from four to five, naı̈ve pol-
icy performance actually gets worse. Clearly, M is but
one measure of perishability, there is also the lifetime
average, lifetime SD, and also the shape of the lifetime
distribution itself to consider. Generally, as we
observe average lifetimes increase, naı̈ve policy per-
formance improves relative to the base case policy.

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Table 4 Naı̈ve Policy Performance The model links the spoilage rate to a given tempera-
Base case Naı̈ve policy % Cost
ture h, relative to the spoilage rate at 0°C (on ice) and
Parameter Value average cost average cost difference is given by r(h) where
Maximum 2 9.93 18.74 88.8
shelf life (M) 3 8.27 10.23 23.7 rðhÞ ¼ ð0:1h þ 1Þ2 : ð11Þ
4 6.91 8.02 16.0
5 6.53 8.65 32.6 If fish is stored at 0°C, then r(0) is 1. Suppose how-
Demand CV (Cd) 0.45 6.72 10.36 54.3 ever that h = 4. Then, r(4) = (0.194+1)2 = 1.96. There-
0.60 7.91 11.38 43.9 fore, the rate of spoilage for fish stored at 4°C is
0.75 9.10 12.49 37.2 nearly twice that of fish stored at 0°C. Thus, if the total
Penalty cost (p) 2.5 5.93 9.92 67.2
5.0 9.36 13.07 39.6
shelf life of a species of fish held in ice from the time
10.0 8.43 11.25 33.4 of catching is known, and the complete time tempera-
Outdating cost (c) 5 7.62 10.21 33.8 ture history is known, then the remaining shelf life
10 10.11 14.45 42.8 can be readily calculated. As an example, consider a
15 5.98 9.58 60.1 shipment of fish stored on a boat at 10°C for one day
which then enters the cool chain for two days at 2°C.
For example, across all experiments with an average If the maximum shelf life on ice is 10 days (e.g., king
product lifetime of 1.5 days, the naı̈ve policy cost per- salmon, sablefish) then the remaining shelf life is
formance is 34% greater than the base case policy. The
relative cost performance improves to 15% for experi- 10  rð10Þ
1  rð2Þ
2 ¼ 10  4  2:88 ¼ 3:12:
ments with an average lifetime of 3.0 days. Intuitively,
As we assume that partial days are infeasible, all
as the product becomes less perishable, we can expect
shelf life values are rounded down (truncated) to the
the naı̈ve policy performance to approach that of the
nearest integer so that in the example provided, the
base case policy.
remaining shelf life would be three days. Neverthe-
less, we did evaluate the impact of truncating the life-
5. Simulation Study time as opposed to rounding to the nearest whole
integer as the shelf life distributions w(
) that ordering
In this section, we report on a simulation study that
decisions are predicated on could be generated either
evaluates the VOI using the heuristics. The simulation
way (e.g., Equation (5)). In fact, we duplicated our
study has two parts. In the first part, we use the TTH
simulation study for the case of rounding and found
parameters to generate probability distributions for
that the VOI is roughly 5% greater when rounding as
shelf life w(
). These distributions and other parame-
opposed to truncating. So our assumption to truncate
ters then serve as an input into the second part in
provides us with a conservative estimate to the VOI
which we simulate the inventory system itself. Below,
that we report in section 5.3.
we first detail the simulation procedures and experi-
To evaluate the VOI, we simulate the transportation
mental design, then report our principal results and
of fresh fish in a two-part supply chain (ambient and
general observations. We then perform a sensitivity
cool) to derive the remaining shelf life of product
analysis and also address the impact of imperfect
available for purchase by the supplier. Let TA and TC
information.
(hA and hC), respectively, denote realizations of time
(temperature) experienced by items in a replenish-
5.1. Simulation Model and Procedures
ment order as it moves through the ambient and cool
For the first part of the simulation, we use a shelf life
parts of the supply chain. Then, the remaining shelf
model that has been developed specifically for fresh
life of items in a replenishment order (when received
fish through years of research at Commonwealth
by the retailer) is given by
Scientific and Industrial Research Organization, Divi-
sion of Food Research, Hobart, Australia. Because of a ¼ M  rðhA Þ
TA  rðhC Þ
TC : ð12Þ
its simplicity and demonstrated accuracy for a large
number of fish species (Bremner 1984, Ronsivalli and We assume that both time and temperature are nor-
Charm 1975), we adopt this model for our study and mally distributed random variables in each part of the
describe it below. We note that any other shelf life supply chain and we generate age distributions w(
)
model may be substituted in its stead. through 1500 simulations. That is, we estimate w(
)
The shelf life of fresh fish is based on a simple for- with the resulting 1500 realizations of product shelf
mula that describes the growth rate of spoilage bacte- life and these are then used in an inventory simula-
ria and deterioration rate of muscle food between tion from which the VOI is evaluated.
temperatures of 2°C and 20°C (28.4°F and 68°F) For the inventory simulation, we develop a com-
(Olley and Ratkowsky 1973, Ratkowsky et al. 1982). puter program where each experiment is simulated

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Operations Management (2014), doi 10.1111/poms.12209
 Ketzenberg, Bloemhof, and Gaukler: Managing Perishables with TTH
12 Production and Operations Management 0(0), pp. 1–17, © 2014 Production and Operations Management Society

for 2100 periods and replicated 30 times. The first 100 Table 6 Supply Chain Time and Temperature Settings
periods of each replication are set aside as the simula- Time Temperature
tion warm-up period so that statistics are calculated
for 2000 periods in each replication. The warm-up Mean SD Mean SD
period is chosen for convenience, yet larger than the Ambient chain 18 3 10 3
number of periods necessary for the system to exhibit Cool chain 36 6 2 1
steady-state behavior. In each replication, the random
number streams across all experiments are identical
in order to reduce the sampling error. The estimated
Table 7 Additional Experimental Time and Temperature Parameter
standard error for the average period cost, using each Values
heuristic, averages 5.6% of its mean value, and has a
maximum standard error of 9.6%. Time Temperature
We test the simulation program by duplicating the
Mean SD Mean SD
set of experiments used to test the heuristics. In this
Ambient 10, 14, 22, 26 1, 2, 4, 5 8, 9, 11, 12 1, 2, 4, 5
test, we compare the VOI obtained using the heuris-
chain
tics in the simulation to the VOI obtained exactly Cool 20, 28, 44, 52 2, 4, 8, 10 0, 1, 3, 4 0.25, 0.5, 1.5, 2.0
using the MDPs. We measure the VOI as the percent- chain
age difference in cost between the base case and the
RFID case, relative to the base case.
In Table 5, we compare the simulated VOI to the
optimal VOI at different percentiles of the VOI across ity with regard to the TTH parameters using a one-at-
test cases. For example, the 50th percentile corre- a-time approach. That is, the full set of 81 base experi-
sponds to the median VOI observed. Considering that ments is duplicated, except one parameter (value) is
the simulated VOI is obtained using the heuristics changed. The additional values (32) we explore are
and the optimal VOI is obtained exactly using the specified in Table 7. In total, there are (81)9
MDPs, the comparisons in Table 5 demonstrate that (1 + 32) = 2673 numerical examples through which
the simulation (and heuristics) provides very accurate we evaluate the VOI.
assessments of the VOI.
5.3. General Observations and Results
5.2. Experimental Design The most striking observation that we find across the
The study comprises a base set of 81 experiments that experimental results is the sheer magnitude of the
is then replicated to explore model sensitivity to VOI that we measure. Overall, the VOI ranges from
additional parameters values. The base set of 0.0% to 73.7%. Clearly, the VOI is sensitive to model
experiments corresponds to a factorial design of the parameters, but for the vast majority of experiments,
following parameter values: c 2 ($5, $10, $15), the VOI is significant, averaging 43.2% and having a
p 2 ($2.5, $5, $10), Cd 2 (0.45, 0.60, 0.75), M 2 mid-range between 32.4% and 53.8%. While studies in
(8, 10, 12). Across experiments, ld = 5 and h = 0.01 the literature that address perishables generally
(again, as we assume periods are days, any reasonable report high VOI, they are not as high as reported here.
holding cost will be trivial). The supply chain time (in For example, Ferguson and Ketzenberg (2006) and
hours) and temperature (in centigrade) parameters are Ketzenberg and Ferguson (2008) are studies that
specified in Table 6. report VOI averaging about 4% with some experi-
The selected parameter values for TTH and shelf ments as high as 37.2%. The principal reason why the
life are commonly observed in supply chains and thus VOI is larger in our study is that information largely
allow an assessment of the VOI relevant to practice. resolves the uncertainty a retailer experiences with
The cost parameters are designed to provide a range respect to supply and that uncertainty largely deter-
over which we can identify the determinants and sen- mines the periodic costs that a retailer incurs. We
sitivity of the VOI. We further explore model sensitiv- explain using an illustrative example.
Consider the case in which M = 10, Cd = 0.6,
Table 5 Comparison of the Simulated Value of Information (VOI) with
c = $10, and p = $5, and all supply chain time and
the Optimal VOI temperature values are taken from Table 6. Hence,
this particular case corresponds to the average case
Percentile 0 5 10 25 50 75 90 95 100 across all experimental conditions. Shelf life is fairly
Simulated 0.4 0.2 0.6 2.6 9.4 18.1 25.4 30.4 50.9 uncertain with a mean of 4.3 days and a SD of 1.6
VOI (%) days. Without information the retailer incurs an aver-
Optimal 0.0 0.2 0.6 2.6 9.6 18.8 26.2 32.3 52.6
VOI (%)
age cost per period of $4.36 that consists of $2.57 in
outdating cost, $1.70 in penalty cost, and $0.09 in

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Ketzenberg, Bloemhof, and Gaukler: Managing Perishables with TTH
Production and Operations Management 0(0), pp. 1–17, © 2014 Production and Operations Management Society
holding cost. The retailer achieves a service fill rate of
93%, while outdating 0.26 units per period. With
information, the retailer is able to dramatically cut
costs—both outdating and penalty and achieves an
average cost per period of $2.69 that is composed of
$1.32 in outdating cost, $1.27 in penalty cost, and
$0.10 in holding cost. The retailer now achieves a ser-
vice fill rate of 95%, while outdating is reduced to 0.13
units per period. Note that with information, the
retailer holds more inventory and experiences less
outdating. For a supermarket operating 360 days a
year, the total savings corresponds to over $600 per
year for this single product example alone—and this
is the average case. Given the notoriously low net
margins in the grocery industry, the nominal cost of
time and temperature tags (quickly approaching a
dollar per chip with a two year lifetime), and the
thousands of products to which the technology can be
applied, the return on investment can be quite signifi-
cant.
Table 8 summarizes our sensitivity analysis for
parameters other than supply chain time and temper-
ature, and shows that the VOI increases with respect
to the penalty cost and outdating cost, but decreases
with respect to the demand CV. The relationship
between cost and the VOI is intuitive. Higher system
costs correspond to a higher cost of product perish-
ability and hence information that reduces the uncer-
tainty with respect to shelf life is valuable. The
relationship between the VOI and demand CV is less
clear. Information used in this study only reduces
uncertainty with respect to shelf life. As Cd increases,
demand uncertainty increases, and the proportion of
total uncertainty represented by shelf life decreases.
Hence, information will only reduce a smaller propor-
tion of total cost.
The remaining parameters relate to supply chain
TTH. These parameters directly influence the product
shelf life. Overall, there is a pronounced concave rela-
tionship between the VOI and shelf life. While the
maximum product lifetime is 12 days for our experi-
ments, the product shelf life varies from 0 to 10 days,
depending on the TTH in the supply chain. The VOI
Table 8 Sensitivity Analysis
Parameter Value
Demand CV (Cd) 0.45
0.60
0.75
Penalty cost (p) 2.5
5.0
10.0
Outdating cost (c) 5 39.9
10
15
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13
is largest at intermediate values (moderate perishabil-
ity) of shelf life. In Figure 1, we illustrate this relation-
ship, showing both the average cost per period in the
base and RFID cases, as well as the VOI as a function
of the mean shelf life remaining after receipt by the
retailer. Given three values of M and the various
parameter values for time and temperature that are
part of the experimental design, there are a total of 99
different shelf life distributions. In Figure 1, there are
a corresponding 99 points for each of the three data
series. We have inserted polynomial fitted trend lines
to highlight the relationships present in the figure.
As can be seen in Figure 1, when lifetimes are short,
costs are higher for both the base and RFID cases as it
is difficult to satisfy demand without incurring out-
dating. When lifetimes are long, little outdating
occurs and it is relatively easy to achieve a high level
of service with very little in the way of lost sales. As
for the VOI, it is greatest at intermediate values of
shelf life. This relationship is best understood in the
context of extreme examples. With short product life-
times of a day or less, information provides little
value as it will not meaningfully change the retailer’s
behavior. That is, the lifetime is always short, so there
is little uncertainty with respect to when product will
perish. At the other extreme, with long product life-
times, the product essentially becomes non-perish-
able. Hence, information that explains shelf life
becomes immaterial and the VOI is insignificant.
5.4. The Case of Imperfect Information
Our analysis to this point has assumed that informa-
tion is perfectly accurate. This has enabled a fairly
broad evaluation of the determinants of information
value. Even so, the supply chain time and tempera-
ture information which arises in our model is used to
make predictions regarding the shelf life of perish-
ables and these predictions are subject to error. An
error in shelf life prediction means that either a
quantity of product will perish prior to or after its
predicted shelf life. As either occurrence may have a
measurable effect on inventory related costs, the natu-
ral question arises as to how robust the VOI is with
respect to the accuracy of shelf life prediction?
While we have based our analysis of the VOI using
a single shelf life model, numerous other models, for
fish and other perishables, have been developed that,
VOI (%) in themselves, constitute a large stream of literature.
47.4 These models are all based on the rate of product
45.2
deterioration. The deterioration of foods that occurs
35.8
40.5 progressively during storage may result from physi-
43.3 cal or chemical changes in the food itself or from the
44.7 activity of micro-organisms growing in or on the
product. The degree to which such deterioration is
43.5
consistently observed across samples of product will
45.0
correspond to the accuracy of shelf life models, where
 Ketzenberg, Bloemhof, and Gaukler: Managing Perishables with TTH
14 Production and Operations Management 0(0), pp. 1–17, © 2014 Production and Operations Management Society

Figure 1 Value of Information (VOI) as a Function of Mean Shelf Life

accuracy is measured in comparison to human sen-
sory based observations.
To assess model performance objectively, an accu-
racy factor was introduced by Ross (1996) and has
largely been adopted in the food science literature.
This factor provides a measure of the average differ-
ence between the observed and predicted values and
is based on a geometric mean expressed as a ratio. For
example, an accuracy factor of 1.1 indicates that, on
average, observed and predicted values differ by
10%. Representative examples of accuracy factors for
model prediction of several food types that are
reported in McMeekin and Ross (1996) are repro-
duced in Table 9.
Observing the disparity in accuracy factors across
the empirical tests of different food types, we proceed
to address the impact of imperfect information on the
VOI. To do so, we update our model by introducing
Table 9 Model Accuracy for Various Food Types
Food type
Low fat milk
Pasteurised whole milk
Minced meat
Evaporated milk
Cream (inoculated)
Poultry
an error term et to Equation (12) that determines the
shelf life remaining for replenishment received in a
period so that we now have
at ¼ M  rðhA Þ
TA  rðhC Þ
TC þ t :
Now, at is a shelf life prediction that may be errone-
ous. We assume that shelf life prediction errors are
normally distributed over time with mean zero and
SD r. Because the lifetime is bounded between zero
and M periods, the errors are bounded as well. That
is, the minimum and maximum predicted lifetime
will fall between zero and M periods as well. We fur-
ther assume that shelf life predictions are used solely
for the inventory ordering decision and that decisions
related to the removal of perished product are made
via sensory observation and are therefore perfectly
accurate.
For example, consider a quantity of product which
is ordered and received that has an actual remaining
lifetime of six periods, but is predicted to only have
Accuracy factor five periods left. If, after five periods, the quantity of
1.07 product has not been sold, then when the inventory is
1.08 reviewed, sensory observation will reveal that the
1.16 quantity of product has not perished. In this case, the
1.08 quantity will remain in inventory for the next period
1.15
and the remaining predicted shelf life will revert to
1.08
one period. If the reverse situation occurs where the

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Ketzenberg, Bloemhof, and Gaukler: Managing Perishables with TTH
Production and Operations Management 0(0), pp. 1–17, © 2014 Production and Operations Management Society
Figure 2 Value of Information (VOI) as a Function of the Error SD
actual remaining lifetime is five periods and predicted
remaining lifetime is six periods, the quantity of prod-
uct will be removed from inventory after five periods
if it has not been sold prior to that point in time. The
net result for underestimating shelf life will be a ten-
dency to hold too much inventory, while for overesti-
mating shelf life will be a tendency to hold too little
inventory.
We simulate the base case set of 81 experiments
introduced in section 5.2 and duplicate them for dif-
ferent errors. Specifically, we implement a factorial
design on r 2 (0.00, 0.25, 0.50, 0.75, 1.00, 1.25, 1.50)
so that there are a total of 157 experiments through
which we can assess the impact of errors on the VOI.
The same simulation procedures described in section
5.1 are used here for the current study.
In Figure 2, we report the relationship between the
error standard deviation and the VOI. Each vertical
string of marks corresponds to the set of experiments
at a given value for r. Clearly, as r increases, the VOI
diminishes. Even so, the VOI remains substantial
until r exceeds 0.75, corresponding to a mean-abso-
lute-percent-error of 14%. At that level of error, the
VOI averages 13.2% across experiments with a mid-
range between 4.4% and 20.8%. Within the food sci-
ence literature, error rates of 20% signify the upper,
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Operations Management (2014), doi 10.1111/poms.12209
15
practically acceptable, limit for predictive accuracy
(McMeekin and Ross 1996).
6. Conclusions
As in previous studies (e.g., Taoukis et al. 1999), we
find that the TTH can significantly affect product
shelf life and thereby generate considerable uncer-
tainty in the management of perishables. Conse-
quently, information on the TTH as a product flows
through the supply chain can be quite valuable.
Using examples of fresh fish, we find that the VOI is
quite sensitive to environmental and parametric set-
tings, ranging upwards to 73.7% with a mean of
43.2%. The highest value is generated by decreasing
spoilage and simultaneously increasing product
availability and thereby service levels. Intuitively,
these cases correspond to operating environments
with high outdating and penalty costs. The large cost
associated with the uncertainty related to successive
replenishment orders perishing out of sequence is a
major factor in the high VOI that we observe. We
also extend our analysis into the impact of imperfect
information and find that the VOI was fairly robust
up to errors corresponding to approximately 14% of
actual values.
 Ketzenberg, Bloemhof, and Gaukler: Managing Perishables with TTH
16 Production and Operations Management 0(0), pp. 1–17, © 2014 Production and Operations Management Society
Interestingly, we find that the VOI decreases with
respect to increasing demand variability and therefore
demand uncertainty. We note that in Ferguson and
Ketzenberg (2006), the VOI increases with demand
uncertainty for fixed lifetime perishables. As discussed
in Ketzenberg et al. (2007), there are conflicting results
reported on the relationship between demand uncer-
tainty and the VOI. Clearly, more research is needed to
better understand this relationship.
There are several avenues for future research. The
most promising, we believe, is a field study that dem-
onstrates the VOI through actual implementation of
RFID technology for TTH monitoring. While there
have been some pilot studies for managing perish-
ables with RFID (e.g., K€ arkk€
ainen 2003), none involve
TTH monitoring. Other areas for future research
involve model extensions to include correlated
demands and batch ordering. We also note that our
research does not address other uses for TTH moni-
toring such as dynamic allocation of product based
on shelf life. With dynamic allocation, soon to perish
product is distributed locally while longer shelf life
products can be distributed to more distant locations.
Acknowledgments
The authors gratefully acknowledge the senior editor and
two anonymous reviewers for their insightful suggestions
to improve the manuscript during the review process.
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Supporting Information
Additional Supporting Information may be found in the
online version of this article:
Appendix S1: Proofs.