Inventory Replenishment for Perishable Items

Inventory Replenishment for perishable items is quite complicated as
* shelf life is limited,
* demand is highly variable,
* and the chance of inventory wastage is high due to expiry. 

Low availability may lead to higher loss sales and increasing freshness may lead to more wastage. Hence, it’s imperative to bring the right balance between availability and freshness.

In this regard, the following key questions arise.
* How can the supply chain of perishable items better plan its inventory? 
* How to ensure high availability at the retailer/distributor?
* How to deal with the variability in the demand at the retailer/distributor? 

In this post, we aim to provide a few thoughts on these questions.

Due to the limited life of the product, the margins play an important role in deciding the inventories that a retailer or a distributor would like to maintain at his end. With higher margins, the retailers have the incentive to keep higher inventories so that any loss due to wastage can be compensated by smaller sales. Similar is the case with the lower margin products. Hence, the retailers at times are pessimistic about products with high variability as they would like to order less to hedge the risk of high wastage. This may lead to higher loss sales and the brand may suffer due to low availability.

One way to deal with this issue is to realign the supply chain so that the availability of products can be increased at retail points. This can be attained by increasing the frequency of fulfilment at the retailer which can also lead to a decrease in order sizes due to lower lead time. The retailer can be moved to a periodic review policy and the inventory level can be determined with higher service levels to ensure increased availability. 

By ensuring higher availability for the retailer, the variability for demand is propagated up the chain. A similar kind of arrangement can be used for the distributor by ensuring higher availability through company-managed inventory at the distributor’s end. The window for loss sales will be quite low at distributors and retailers due to high service levels and smaller lead times.

Since the variability in the demand is propagated to the manufacturer, the inventory across the supply chain can be better planned due to risk pooling and using multi-echelon inventory optimization.