Stocking and discounting decisions for perishable commodities using expected profit approach

Abstract

Purpose

Commodities that have a fixed useful life are said to be perishable commodities. These commodities pose special problems to retailers and distributors as these have to be sold before their shelf‐life. Retailers offer discounts on perishable products nearing their shelf‐lives to encourage consumers to buy. In these situations, retailers would like to know when they should begin to offer the discount, what should be the quantum of discount, and how many units of the commodity they should stock on the shelf to maximize their expected profit. This paper aims to address these three issues.

Design/methodology/approach

A recently published paper has suggested a simple procedure based on expected profits to identify time and quantum of discount for perishable products. Extending this, a modified empirical procedure is suggested in this paper to identify the number of units to be stocked, discount period and the quantum of discount. A numerical illustration is used to explain the steps involved in the procedures.

Findings

It is shown that offering discounts results in higher profit compared to the profit with no discount.

Research limitations/implications

For more complex situations where discounts are changed more frequently, simulation methodology or the yield management principles could be used. Game theory can be employed to identify the equilibrium strategies of price‐sensitive consumers and retailers.

Practical implications

Aids retailers and distributors with the special problems presented by the disposal of perishable commodities.

Originality/value

The application of an expected profit approach suggested earlier is extended to identify the number of items to be stocked. The results will be useful to retailer managers.

Citation

Ramanathan, R. (2006), "Stocking and discounting decisions for perishable commodities using expected profit approach", International Journal of Retail & Distribution Management, Vol. 34 No. 2, pp. 172-184. https://doi.org/10.1108/09590550610649812