When confronted with a choice between a lettuce with a “best before” date falling in two days’ time and one in four days’ time, a supermarket customer will typically plump for the latter. This choice puts the product remaining on the shelf one step closer to a clearance sale, or even to the bin. “Waste is substantial in retailing,” note HKUST’s Qing Li and Lilun Du in a paper prepared with a colleague from Chongqing University. In the U.S., they point out, about 40% of food is wasted, much of it in the retail sector, while Hong Kong supermarkets throw out 87 tons of food daily, with a large proportion ending up in landfill.
Managing such perishable items is challenging, the authors point out. Demand is uncertain; such items “typically have very short lifetimes,” and must be sold quickly and “customers choose items on a last-in-first-out (LIFO) basis.” Retailers have responded by making fresher products harder to reach, or by stocking shelves more frequently with fewer items. However, making something harder to reach does not make it impossible, while frequent restocking is labor-intensive and requires constant monitoring and refrigerated storage.
Their paper, the authors say, adds “a new weapon to the arsenal in the war against perishability: transshipment.” Transshipment in retailing is a practice where one outlet ships its excess inventory to another outlet with inventory shortages. According to the researchers, it “has not been studied in retailing of perishable products under the LIFO rule.” To determine the extent of the benefits that transshipment can generate, the authors consider a series of approaches––“a class of heuristic policies”––in which figuring out the “optimal actions” relies only on the number of items expiring in a given period and the number remaining.
The setting for the exercise is an offline retailer with two outlets that replenishes its perishable items every period. At the end of each period, the retailers can either put products that have not expired into a clearance sale or carry them over to the next period. “The products have a fixed finite lifetime,” the authors specify. “The retailer can also transship them from one outlet to the other.” Such transshipment allows the retailer to put newer inventory in one outlet and older inventory in the other. “This makes it easier to sell older inventory and reduces waste as a result,” note the researchers.
Their numerical analysis shows that transshipment can increase profit by as much as several percentage points. It is most valuable when “the ordering cost of products is high, outdating cost is high, clearance sale price is low, or demand variability is high.”
Given that the value of perishables is typically low, transshipment is viable only when the scale is large and the logistics are extremely efficient. “It is a challenge to strike the right balance between the need to reduce waste and business and consumer interests,” say the researchers. “Helping retailers to improve their operations, however, may boost their bottom lines, and at the same time reduce waste.” The rigorous analysis presented in this paper may help retailers to achieve both important objectives.