A Marginal Analysis Framework to Incorporate the Externality Effect of Ordering Perishables

Abstract

Finding the optimal policy for multi-period perishable inventory systems requires solving computationally-expensive stochastic dynamic programs (DP). To avoid the difficulty of solving DP models, we propose a framework that uses an externality term to capture the long-term impact of ordering decisions on the average cost over an infinite horizon. By approximating the externality term, we yield a tractable approximate optimality condition, which is solved through standard marginal analysis. The resulted policy is near-optimal in long-run average cost and ordering decisions.