Managing Slow Moving Perishables in the Grocery Industry

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Ferguson, Mark E.
Ketzenberg, Michael E.
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We address the value of information (VOI) and value of centralized control (VCC) in the context of a two–echelon, serial supply chain with one retailer and one supplier that provides a single perishable product to consumers. Our analysis is relevant for managing slower moving perishable products with fixed lot sizes and expiration dates of a week or less. We evaluate two supply chain structures. In the first structure, referred to as Decentralized Information Sharing, the retailer shares its demand, inventory, and ordering policy with the supplier, yet both facilities make their own profit-maximizing replenishment decisions. In the second structure, referred to as Centralized Control, incentives are aligned and the replenishment decisions are coordinated. The latter supply chain structure corresponds to the industry practices of company owned stores or vendor–managed inventory. We measure the VOI and VCC as the marginal improvement in expected profits that a supply chain achieves relative to the case when no information is shared and decision making is decentralized. Key assumptions of our model include stochastic demand, lost sales, and fixed order quantities. We establish the importance of information sharing and centralized control in the supply chain and identify conditions under which benefits are realized. As opposed to previous work on the VOI, the major benefit in our setting is driven by the supplier’s ability to provide the retailer with fresher product. By isolating the benefit by firm, we show that sharing information is not always Pareto improving for both supply chain partners in the decentralized setting.
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