Quality and Operations Management in Food Supply Chains

Quality Based Pricing for Perishable Products

In this subsection, we summarize the up-to-date research on pricing problems related to time-linked quality for perishable products. Recently, customers are more concerned about food safety and become more sensitive to food quality when purchasing food products. The demand for food products is highly linked to food quality. Due to the nature of food products, quality drops with time following a dynamic state. Therefore, static pricing strategies may result in inappropriate quality control and excessive inventories in food supply chains. Many scholars did research on the dynamic pricing strategies to help firms reduce waste and enhance profit and food safety.

Models with Single Products and Homogenous Customer Preferences

In today's food supply chains, various technologies (e.g., ratio frequency identification technology (RFID) and time temperature indicator (TTI)) can be adopted to capture product information (e.g., temperature, humidity, and the time period) automatically. Thus, this kind of information can be used to predict food quality and remaining shelf life, which supports the decisions on inventory control and pricing decisions. Besides, customers are often sensitive to the product quality and they alter their purchasing decisions toward products with different qualities.

Ferguson and Koenigsberg established a two-period model, considering product quality decline, quality dependent demand, and competition. The research aims to optimally determine the prices and inventory to maximize the total profit. Blackburn and Scudder studied supply chain strategies together with pricing decisions based on perishable products' marginal-value-of-time (MVT). Sainathan studied the pricing and replenishment strategies for a perishable product with two-period lifetime when customers' utility is quality sensitive. In each period, new products and old products were differently priced to maximize the total profit. Wang and Li proposed a real time quality based dynamic pricing model for perishable foods in a supply chain with quality sensitive customers. Compared to the static pricing strategy, this quality-based pricing strategy helps reduce food spoilage waste and bring more profit to the retailers. A real case was also used to illustrate the results in the analytical models.

Adenso-Díaz et al.  proved that dynamic pricing can significantly reduce the total waste of the perishable products, as Wang and Li demonstrated. However, the spoilage reduction may come as a loss in total revenue that can vary dramatically, depending on the scenario and the speed of the price discount strategy. Also, based on the assumption that retailers can utilize time-temperature-indicator-based automatic devices, Herbon et al. studied an optimal dynamic pricing model considering product perishability and customers' satisfactions. Herbon and Khmelnitsky studied an integrated ordering and dynamic pricing model for perishable products when customers are highly sensitive to food quality. Unlike Wang and Li, they studied a continuous dynamic problem rather than a discrete one. They also showed that the efficiency of the dynamic approach depends on the form of demand incorporated into the model.

Models Considering Product Differentiation

Product differentiation is a factor that the retailers should consider when they make ordering or pricing decisions. When product lifetime is considered, products at different ages are different but still substitutable, which may affect customer purchasing behaviors. Chew et al. studied an integrated ordering and dynamic pricing problem for a kind of perishable product with multiperiod lifetime. The products at different ages, mutually substitutable, are all available in the market. The results showed that, under the assumption of product substitutions, the retailer's total profit increases significantly. Chen et al. studied a combined pricing and inventory control problem considering product perishability with a fixed shelf life over a finite horizon. Heuristic policies were proposed to solve the models. In addition, they also proved that their model is applicable when the product's lifetime is stochastic.

Herbon also studied the pricing policies for a kind of perishable product with different ages. The author compared two strategies: fixed pricing and differentiated pricing. The author found that an optimal pricing policy is to implement price discrimination with respect to consumers' sensitivity to freshness, while dynamically changing the price over time, starting with a lower price at the early stages of the product's shelf life and increasing it at a later stage. Hu et al. established a joint inventory and price markdown model considering customers' strategic behaviors. To reduce costs, the firm can either choose to discard the leftover inventory or set a clearance price. Li et al. studied an inventory control problem with clearance sales strategies and product perishability. They proposed two myopic heuristics to solve the problems with partial information.

Models Considering Heterogeneous Customer Preferences

Customers often have different valuations towards the same kind of products with same quality. Such customer heterogeneity on product quality for perishable products has also been considered. Akçay et al. studied a dynamic pricing problem of a firm which sells multiple differentiated products with linear random consumer utilities. Gallego and Hu studied a dynamic price competition problem in an oligopolistic market when products perish over time. Herbon proposed a pricing model under consumer heterogeneity in consumers' sensitivity to freshness of a perishable product. He compared the model with and without the consideration of such heterogeneity. Also evaluated are the conditions in which a dynamic pricing policy is beneficial either to the retailer or to the consumer, as compared with a static pricing policy.

In Herbon, customers were also assumed to be heterogeneous in their sensitivity to freshness, that is, their willingness to pay more for fresher products. A dynamic pricing model was developed to evaluate the extent to which both the retailer and the customers benefit from the dynamic pricing policy as opposed to the static pricing policy. Herbon also studied a model with multiple competing perishables with different remaining lifetimes and selling prices. It is found that when customers are homogeneous in their preferences, single-product-age operational mode outperforms the multiple-product-age operational mode. Herbon studied an inventory and pricing model considering customers' heterogeneity towards the real time quality of the perishable products. The effects of remaining shelf-life, price, and perceived quality on demand were investigated in their models. Also, it is shown that highly heterogeneity can benefit the sellers because more products will be sold. In addition, Herbon demonstrated that customer information is crucial to determine firms' pricing decisions for perishable products and customers' heterogeneous preference for product freshness.

Models Combined with Inventory Decisions

In many situations, inventory policies and pricing policies are mutually affected in perishable food supply chains. Pasternack studied a pricing problem for a kind of perishable product combined with customer returns. The author showed that full credit provided by the manufacturer is effective in coordinating the supply chain when there is a single retailer. However it is not effective when facing multiple retailers. Li et al. studied the pricing problem together with the inventory decisions in which price is linked to demand and products have two-period lifetime. Li et al. assume that product perishability affects demand. Based on this assumption, they studied the joint dynamic pricing and inventory control problems for perishable products when the seller cannot sell new and old products at the same time. In each period, the seller determines to sell new products and makes replenishment policies or to sell old products and dispose of the inventory at the end of the period. The study shows counterintuitive result that profit maximization does not guarantee lower expirations.

Chen and Sapra studied a joint pricing and inventory decisions for a perishable product with two-period lifetimes. They compared the first-in-first-out with first-in-last-out strategies and found that bigger orders should be placed in the FIFO system. Chung and Erhun studied a two-level supply chain coordination problem considering perishable products with two periods of shelf life. Kaya and Polat studied a problem of jointly determining the optimal pricing and inventory replenishment strategy for a deterministic perishable inventory system in which demand is time and price dependent. The price adjustment cost (also called Menu cost) is considered when the seller changes its selling price during the lifetime of the products. Chen et al. also considered Menu cost in their integrated dynamic inventory and pricing decisions models. They found that when Menu cost is moderate, a one-time price adjustment price policy outperforms the multi-time price adjustment policy. Chua et al. studied the optimal price discount and replenishment policies for a perishable product with short lifetime and uncertain demand.

Summary

In reality, customers are sensitive to the food qualities. Thus, to ensure the profit gains, firms need to provide more fresh products to customers. In the presented models, customers' preference is directly linked to the product quality in each instance. In the first part, researchers studied the single product pricing problems with homogenous customers' preference. Then models with multiple products or multiple types of customers are presented. Lastly, ordering decisions combined with pricing decisions are reviewed.