Dynamic warehouse size planning with demand forecast and contract flexibility

Abstract

This paper develops a dynamic warehouse planning model incorporating demand forecast and contract flexibility, and addresses how demand forecast and contract flexibility affect warehouse size planning. In this model, a manager announces a nominal size of the warehouse space to rent before the planning horizon begins (strategic decision), and determines the ordering quantity and actual warehouse size during the horizon (operational decision). In particular, the manager can adjust the actual warehouse size within a range according to dynamically updating demand forecast during the horizon, which reflects the contract flexibility. We start with the characterisation of the operational decision. For any given nominal size, we show the monotonicity of optimal inventory replenishment and warehousing decisions w.r.t. demand forecast and contract flexibility. However, this monotonicity does not necessarily hold for the strategic choice of the nominal size. Finally, a case study is presented to investigate the interaction between demand forecast information and contract flexibility. We find that the value of demand forecast can be enhanced as the contract flexibility improves. However, more forecasted demands do not imply higher value of contract flexibility.