Updating Inventories of Substitutable Resources in Response to Forecast-Updates

Abstract

We show simple yet optimal results to update the inventory/capacity levels, expected profit, fill rates, and service levels of substitutable resources, in response to an updating of the mean demand forecasts for the resources. We find that a change in the mean demand of one resource does not affect the optimal inventory level of any other resource. The results are obtained for demands with location-scale distributions, and for a revenue structure satisfying a triangle property such that the manager will always use the inventory of a resource to meet its own demand first before using it for substitution. The results for updating the performance measures also extend to managers who maintain non-optimal inventory/capacity levels. Implications for procurement, sales and operational planning, and multi-store operations are discussed.