Sustainable Inventory Management for Perishable Dairy Products: A Circular Economy Approach Integrating Environmental Costs

The transition toward sustainable food systems requires innovative approaches to man-aging perishable products, where inefficient inventory practices contribute significantly to global food loss and environmental degradation. This study develops a circular economy-oriented inventory optimisation framework for dairy supply chains that inte-grates environmental externalities and waste valorisation pathways into operational de-cision-making. Departing from traditional linear "produce-consume-dispose" models, we embed three core sustainability mechanisms into a stochastic dynamic program-ming framework: (1) progressive environmental cost internalisation aligned with EU Emissions Trading System carbon pricing, capturing both waste-related emissions and cold-chain energy footprints; (2) circular economy value-recovery channels that redirect near-expiry products to secondary applications (animal feed, biogas production, indus-trial processing) rather than disposal; and (3) deterioration-aware demand management that minimises resource throughput while maintaining service levels. Empirical cali-bration using Ukrainian dairy industry data demonstrates that sustainability-integrated inventory policies reduce waste generation by 4.8–10% relative to conventional ap-proaches, with high-deterioration products showing the greatest potential for improve-ment. We identify a critical threshold in the circular economy: when salvage recovery rates exceed 35%, waste transforms from an environmental liability into an economic and ecological asset, fundamentally altering the sustainability calculus of inventory de-cisions. Environmental costs account for 4.6% of total operating expenses at current car-bon prices, a share projected to increase substantially under tightening climate regula-tions. Our findings provide actionable guidance for dairy supply chain stakeholders pursuing the Sustainable Development Goals (SDGs 2, 12, 13): processors should estab-lish circular-economy partnerships that achieve salvage rates above 35%, implement product-specific policies for high-deterioration items, and proactively integrate carbon pricing into inventory optimisation. The framework bridges sustainable operations the-ory and circular economy practice, offering a replicable model for transitioning perish-able food supply chains toward closed-loop, low-waste configurations that simultaneous-ly reduce environmental impact and enhance economic performance.