A marginal analysis framework to incorporate the externality effect of ordering perishables

The exact analysis of optimal ordering policies for periodic-review perishable inventory systems is challenging because their high-dimensional state space arising from multiple interrelated decisions over many periods and age distributions on-hand products. We develop a new marginal framework to approximate this complex multiple-decision model into single-decision with an externality term, which internalizes the long-term impact decisions. Our externality-based approximation utilizes constant base-stock policy; it fast easy apply. Numerical experiments show that our approach provides state-dependent amounts almost identical dynamic programming-based policy.