Inventory control and picking behavior: The roles of sustainability messages and price discounts

Abstract

Customer picking behavior plays an important role in retail inventory management. Inventory models often distinguish between picking the freshest items, i.e., last-in-first-out (LIFO), or oldest items first, i.e., first-in-first-out (FIFO). We analyze how picking behavior affects inventory management, and how sustainability messages and price discounts can change picking behavior to increase sales of earlier expiring items and reduce food waste. By conducting an online experiment, we find that: (1) sustainability messages induce more subjects to buy earlier expiring items; (2) higher price discounts increase sales of earlier expiring items; and (3) some subjects do not change their behavior, or crowd out with price discounts. Understanding how different customer types respond to incentives helps retailers offer them only to customers who most likely respond with buying expiring items. We evaluate the effect of these findings on inventories using a periodic review model for perishable items with age-dependent lifetimes. Assuming Poisson and Negative Binomial demand in our numerical study, we find that the retailer’s costs may be up to 30.25% lower under pure FIFO compared to pure LIFO demand. We estimate the cost savings if a retailer nudges customers to change their picking behavior and analyze different FIFO-LIFO splits, which is more realistic than the retailer assuming pure FIFO or LIFO picking behavior. Furthermore, we show that misspecification of the FIFO-LIFO split has a notable effect on inventory costs, in-stock probability and waste, and that the retailer should rather slightly overestimate FIFO than LIFO if actual picking behavior is unknown.