An opaque selling scheme to reduce shortage and wastage in perishable inventory systems

TL;DR

This paper proposes an opaque selling scheme that reduces demand variability, thereby decreasing both shortage and wastage in perishable inventory systems, supported by analytical and numerical validation.

Contribution

It introduces a demand-balancing opaque scheme for perishables, providing analytical insights and practical guidelines for cost reduction.

Findings

The opaque scheme effectively reduces demand variability.

The ratio of opaque proportion to demand variability determines effectiveness.

A rule of thumb for optimal opaque parameters is provided.

Abstract

Effective management of perishable inventory systems is often strewn with challenges, especially when a strong trade-off relationship exists between shortage and wastage of perishables: A smaller inventory increases the chance to lose sales (leading to higher expected shortage cost), while a larger inventory increases the chance to waste perishables (leading to higher expected wastage cost). The root cause of this strong trade-off relationship is high product demand variability. To mitigate the issue and reduce the cost of operating perishable inventory systems, some grocery stores utilize an opaque selling scheme: selling an anonymous product whose brand or exact specification is shielded from customers at the time of sale. The use of opaque products has now become a popular means to reduce shortage/wastage at grocery stores. However, there has been little discussion of the effectiveness of opaque schemes applied to perishable inventory systems. In this paper, we propose an opaque scheme based on the balancing policy on demand, which tries to average out orders for products. We confirm both analytically and numerically that this opaque scheme effectively reduces product demand variability, thereby reducing both shortage and wastage for perishable inventory systems under a base-stock policy. We also present an analytical formula that reveals insights into the opaque scheme: The ratio between the opaque proportion and the coefficient of variation of product demands plays a key role to determine the effectiveness of our opaque scheme. Furthermore, we provide a rule of thumb to find the threshold opaque scheme parameters needed to achieve the maximum total cost savings for perishable inventory systems. We hope that many retailers selling perishables (e.g., fresh produce and baked goods) find the opaque scheme useful, implement it, and contribute to the reduction of the food wastage.