Optimal ordering policies for a product that perishes in two periods subject to stochastic demand

A feasible one period model is constructed and the central theorem deals with the n-stage dynamic problem and demonstrates the appropriate cost functions are convex in the decision variable and also provides bounds on certain derivatives.

Abstract

Abstract This paper considers the problem of computing optimal ordering policies for a product that has a life of exactly two periods when demand is random. Initially costs are charged against runouts (stockouts) and outdating (perishing). By charging outdating costs according to the expected amount of outdating one period into the future, a feasible one period model is constructed. The central theorem deals with the n ‐stage dynamic problem and demonstrates the appropriate cost functions are convex in the decision variable and also provides bounds on certain derivatives. The model is then generalized to include ordering and holding costs. The paper is concluded with a discussion of the infinite horizon problem.