Abstract
This article studies a single-item periodic-review inventory problem with stochastic demand, uncertain price, and price search cost. At the beginning of a period, an inventory manager has to decide, considering the current inventory level, whether a price should be searched for at a non-zero cost. Once the price is known, she will have to decide the order size. For tractability the number of realizable prices is limited to two and (r, S1, S2)-type policies are considered, where r is the threshold for the price search decision and Si is the order-up-to level for price pi for i = 1, 2. Although the problem is significantly simplified, it still allows for price speculations by the inventory manager; i.e., she requests a quote but may not buy. The properties of long-run average costs are studies and optimization algorithms are presented. Numerical studies show the effectiveness of the proposed policy compared with classic (s, S)-type policy and its natural three-parameter extension.
Highlights
Inventory management has become an important aspect of economic activities due to the tremendous investment in inventory systems, as Nahmias (2005) points out
An (r, S1, S2) policy with r < S2, S1 ≤ S2 is proposed for the problem with two prices
The properties of the total cost functions are first studied, and the optimization algorithms are devised based on the properties of the cost functions
Summary
This thesis studies a single item periodic review inventory management problem with stochastic demand, random price and quotation cost. An (r, S1, S2) policy with r < S2, S1 ≤ S2 is proposed for the problem with two prices It prescribes that when the inventory is less than or equal to r, the price quotation is requested; if the higher price is quoted, order up to S1, otherwise to S2. It reveals that in some cases it is optimal to search price speculatively, that is with S1 < r, to request a quote but only place an order when the lower price is realized, when the inventory level is between S1 and r
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