A Note on Inventory Policies for Products with Residual-Life-Dependent Demand

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Applied Mathematical Modelling




We study inventory ordering policies for products that attract demand at a decreasing rate as they approach the end of their usable lifetime, for example, perishable items nearing expiration. We consider the “product freshness’’, or equivalently, the time until expiration (“residual life”) as a factor influencing the customer demand. In a profit-maximizing framework, we build on the Economic Order Quantity (EOQ) replenishment model and formulate the inventory ordering problem using a deterministic demand function that is concave decreasing in the the age of the product. We provide analytical results on the optimal ordering policy, including an explicit characterization of the decisions in the linear-demand case, and we develop an easy-to-implement adaptive heuristic policy for the general case. Numerical examples show that the optimal policy generates significant profit gains compared to the traditional cost-based policies and the adaptive heuristic policy performs highly satisfactorily in the tested instances.