A Comparison of the Optimal Ordering Levels of Bayesian and Non-Bayesian Inventory Models

Abstract

Although it is often the case that the parameters of the distribution of demand are not known with certainty and that a Bayesian formulation would be appropriate, such an approach is generally not used in inventory calculations for computational reasons. Since one often resorts to a non-Bayesian formulation, it is of interest to compare Bayesian policies with a comparable non-Bayesian policy. Using the concept of flexibility it was anticipated that the quantity ordered under the non-Bayesian policy would be greater than or equal to that under a Bayesian policy. This result is established for the n-period nondepletive inventory model. However, a two-period counterexample is given for the standard (depletive) inventory model.