The Orders Beyond MLOR (OBM) clause: Enhancing flexibility in retailer–supplier agreements for perishable products

When shopping for perishable products, consumers typically prefer the freshest items, especially those with a short shelf life. With that in mind, retailers establish strict contractual agreements with suppliers to ensure the fulfilment of their orders for perishable products. One key condition in these agreements is the Minimum Life On Receipt (MLOR) rule, which defines the maximum product age that the retailer will accept at full price. In this study, we propose a model that facilitates the negotiation of retailer-supplier terms to increase flexibility. Specifically, we define the share of orders retailers should accept beyond the MLOR at a discounted price. We formulate the problem as a bilevel program considering the individual objectives of the retailer (leader) and the supplier (follower), while also accounting for consumer demand driven by both price and product freshness. To address the bilevel problem, we employ a reformulation-and-decomposition algorithm adapted from the literature. We then compare the supply chain benefits of solving the bilevel program with those of optimising the retailer’s and supplier’s objectives jointly in a centralised approach, as well as to standard contract terms in which products are returned if the supplier does not meet the MLOR requirement. Our results demonstrate that flexible agreements offer significant benefits, with average profit increases of up to 4% for retailers and up to 13% for suppliers. Finally, we provide suggestions for designing new clauses that account for consumer demand variability and retailer’s order frequency.