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

TL;DR

This paper introduces a framework using an externality term to simplify the complex problem of optimizing multi-period perishable inventory systems, resulting in a near-optimal policy that accounts for long-term costs.

Contribution

The paper proposes a novel marginal analysis framework incorporating externalities to approximate optimal policies in perishable inventory management.

Findings

The framework produces policies close to the optimal in long-term average cost.

It simplifies complex dynamic programming problems into tractable marginal analysis.

The approach effectively captures the externality effects in inventory decisions.

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.