Truncated Balancing Policy for Perishable Inventory Management: Combating High Shortage Penalties

Problem definition: Motivated by a platelet inventory management problem, we study a fixed-lifetime perishable inventory management problem under a general demand process with dynamically evolving forecasts. Determining an optimal ordering policy for perishable inventory systems is particularly challenging due to the well-known "curse of dimensionality." Approximation policies with worst-case performance bounds have been developed in the literature for perishable inventory systems. However, using real data, we observe that the existing policies tend to under-order when the unit shortage penalty is high, which is an important concern for critical perishable products, such as life-saving blood products. We seek to address this problem in this paper. Methodology/results: We present a new approximation policy for perishable inventory systems, which we call a truncated balancing policy. In particular, we first define a new balancing ordering quantity and prove a novel lower bound on the optimal ordering quantity. We then define our policy such that the maximum between the balancing ordering quantity and the lower bound is ordered at each period. We prove that when first-in, first-out (FIFO) is an optimal issuing policy, our proposed policy admits a worst-case performance bound of two. We also present a new sufficient condition that ensures the optimality of FIFO. Finally, we present a calibrated numerical study based on real data from our partner hospital, and show that our proposed policy performs significantly better than the existing policies presented in the literature. Managerial implications: Managers should be cautious in selecting inventory policies when there is an imbalance in the underage and overage cost parameters. In particular, when the unit shortage penalty is high, as it is in blood inventory systems, simply balancing the underage and overage costs can lead to under-ordering. Our proposed policy effectively addresses this drawback. Moreover, it is easy to compute (especially for products with relatively short shelf lives) and hence appealing from a practical perspective.