Inventory Considerations Research Articles

Risk-averse order policies with random prices in complete market and retailers’ private information

We consider a retailer who orders products before the price for them becomes known. The price is an outcome of perfect competition in a complete market. Since the demand is price sensitive, the uncertainty in prices induces uncertain profits and associated risks. In this paper we show that if the retailer is risk averse and, as a result, selects a utility function of profit to maximize, then his subjective assessment of future prices is affected by the risk attitude. This, in turn, introduces a bias in retailer’s ordering policies. By considering coordinated pricing and ordering policies we derive a relationship between risk aversion, retailer’s subjective (private) assessment and the market implied, risk neutral forecast. This relationship and the induced bias are then illustrated for two typical operations management strategies which involve either inventory considerations or promotions avoiding accumulation of stocks.

On the Benefits of Collaborative Forecasting Partnerships Between Retailers and Manufacturers

This paper studies the potential benefits of collaborative forecasting (CF) partnerships in a supply chain that consists of a manufacturer and a retailer. To reflect the reality in production environments, we propose a scorecard that captures inventory considerations, production smoothing, and adherence-to-plans. We present a prescriptive convex-cost production planning model for the manufacturer, and a replenishment model for the retailer. We use our integrative reference model to study the potential benefits of CF partnerships. Overall, we find that the benefits of CF depend on the following key characteristics of the supply chain: the relative explanatory power of the supply chain partners, the supply side agility, and the internal service rate. CF is expected to bring high benefits to the supply chain when the manufacturer has the largest relative explanatory power. But quite disappointingly, in these cases a CF partnership does not appear to be valuable to the manufacturer. When the retailer is the dominant observer of market signals, CF typically yields a “win-win” outcome. In order to effectively act upon the information exchanged via CF, the supply side needs to be sufficiently agile. The benefits reported in this paper should be considered as conservative. This is because CF partnerships often bring better information, improved decision support technologies, as well as process improvement to the trading partners. Consequently, the supply side agility can be improved. If this indeed happens, the compound benefits of CF can be dramatically higher than our conservative estimates. Finally, we provide a qualitative discussion of the possible role of internal service rates in supply chains, either as planning parameters to improve performance, or as a mechanism for sharing the benefits of CF between the trading partners.

Informative trading or just costly noise? An analysis of Central Bank interventions

We conduct an empirical investigation of the impact of Central Bank intervention on the process of price formation in foreign exchange markets. The main contributions of this paper are (i) in considering the effects of official interventions on multiple dimensions of such a process beyond the first and second moment of currency returns and (ii) in exploiting insights from the analysis of market liquidity in proximity of these trades to explain their effectiveness. For that purpose, we employ a unique dataset of tick-by-tick indicative quotes and intraday (informative) sterilized spot interventions and (uninformative) customer transactions executed by the Swiss National Bank (SNB) on the Swiss Franc/U.S. Dollar exchange rate (CHFUSD) between 1996 and 1998. Using several empirical strategies (some of which are novel to the exchange rate literature), we find that the effectiveness of these trades is crucially related to their perceived information content, rather than to imperfect substitutability or inventory considerations. Indeed, regardless of their size, only SNB interventions (especially when unexpected or leaning against the wind) have significant and persistent effects on daily CHFUSD returns, although they often fail to smooth currency fluctuations. Nonetheless, only SNB interventions, regardless of their effectiveness, induce significant misinformation and heterogeneity of beliefs among market participants and deteriorate market liquidity. These externalities always translate into higher, economically significant transaction costs borne by investors.

Component commonality in assembled-to-stock systems

This paper quantifies the impact of component sharing in a two-echelon assembled-to-stock system consisting of several common components and end-products. Whereas there is a benefit from risk pooling when component sharing is allowed, there is also a component-mismatch problem due to the demand uncertainty for end-products. We study these conflicting effects by comparing a particular component sharing policy, namely the equal-fractile allocation policy, with a make-to-stock system which does not allow the allocation of common components. The probabilistic analysis shows that when each type of component is shared by at least two end-products, the equal-fractile allocation policy will always help to reduce the safety stock required to be held at a sufficiently high service level. We also look at a special scenario of the equal-fractile allocation policy which takes into account inventory cost considerations. We show that this problem can be formulated as a newsvendor problem.

Static and Dynamic Pricing in Online Markets

Commentators have observed that the ease of monitoring competitors on the Internet may allow Internet retailers to engage in non-competitive pricing. Using data on the daily prices of 399 books at 26 online bookstores between August 1999 and January 2000, we investigate firm pricing behavior in the online book market. Although sales in the Internet channel were growing very rapidly at the time, we find that relative prices differed across the three categories of bookstores (big three, active fringe, and inactive fringe), and these differences were remarkably stable over time. We present a simple model in which cross-channel competition and differentially informed consumers lead to the observed (static) pricing patterns. Although relative prices were stable, prices did change and were on average increasing over time. We document the dynamic strategic interaction across firm categories and across individual firms. Ten pairs of firms involving seven individual firms changed prices in the same direction on the same book within three days in an (one standard deviation) above average number of cases and respond more than 25 percent of the time to competitors' price changes. Given the behavior of these firms and the large market shares held by the top three firms, we formally test a number of oligopoly and non-oligopoly explanations for the observed price changes. We find that the observed patterns were not consistent with the predictions of oligopoly pricing in the Haltiwanger and Harrington (1991) model or with other explanations such as customer loyalty, inventory considerations or changes in elasticity of demand associated with holidays. We conjecture that the observed cases of parallel pricing were largely attributable to experimentation on the part of the initiator and learning or competitive response on the part of the responder.

Dynamic Pricing in the Presence of Inventory Considerations: Research Overview, Current Practices, and Future Directions

The benefits of dynamic pricing methods have long been known in industries, such as airlines, hotels, and electric utilities, where the capacity is fixed in the short-term and perishable. In recent years, there has been an increasing adoption of dynamic pricing policies in retail and other industries, where the sellers have the ability to store inventory. Three factors contributed to this phenomenon: (1) the increased availability of demand data, (2) the ease of changing prices due to new technologies, and (3) the availability of decision-support tools for analyzing demand data and for dynamic pricing. This paper constitutes a review of the literature and current practices in dynamic pricing. Given its applicability in most markets and its increasing adoption in practice, our focus is on dynamic (intertemporal) pricing in the presence of inventory considerations.

Return reversals in the bond market: Evidence and causes

The finance literature has shown that equity returns are predictable using past returns. This study extends that literature by examining bond return predictability. Using returns constructed from dealer bid prices, we find short- to intermediate-term reversals in investment grade corporate bond returns. These reversals are larger in the first half of the sample period and consistent with the predictions of dealer inventory cost models. This supports Jegadeesh and Titman’s [J. Financ. Intermed. 4 (1995) 116] assertion that daily, weekly, and monthly reversals in equity returns come from dealer inventory considerations, not behavioral biases. Finally, unlike equity returns, we find no evidence of momentum in bond returns.

Dynamic pricing in the presence of inventory considerations: research overview, current practices, and future directions

This publication contains reprint articles for which IEEE does not hold copyright. Full text is not available on IEEE Xplore for these articles.

Price Leadership in the Spot Foreign Exchange Market

This study empirically investigates how new information is incorporated into intra-daily DM-$US quotes, and finds evidence that certain dealers consistently incorporate new information into their quotes before others and that their behavior is influenced by market conditions. In general, Chemical Bank's quotes are the first to contain new information. However, in the periods of uncertainty around central bank interventions, evidence suggests Deutsche Bank is the price leader and its quotes are influenced by information and inventory considerations.

The determinants of foreign exchange intervention by central banks: evidence from Australia

Intervention by the Reserve Bank of Australia on foreign exchange markets from 1983 to 1997 is conjectured to have been determined by exchange rate trend correction, exchange rate volatility smoothing, the US and Australian overnight interest rate differentials, profitability and foreign currency reserve inventory considerations. Using Probit and friction models, we show that these factors were significant influences on intervention behavior. Consistent with the constraint of intervening only when a clear trend is apparent, we find that above average measures of deviations from trend and of volatility muted the response of the Reserve Bank.

Dealer Behaviour and Market Quality when Insiders Trade

This paper examines the impact of insider trading activity on the trading behaviour of dealers and on market quality. Specifically, the activity we investigate is the trading of London Stock Exchange listed equities by incumbent company directors. We find that dealers adjust their inventory control strategies during periods of such insider activity. In the ten day period subsequent to an insider trade, dealers tighten their inventory control resulting in stronger mean reversion in inventories. However, there is no evidence that the depth of the market is affected by the insider trade or that dealers feel the need to utilise the inter-dealer market to share inventory risks to a greater extent. However, when price changes due to temporary inventory considerations are taken into account, the large price changes reported in many insider-trading studies disappear. The paper also investigates if the dealer participating in the insider trade acts as a quasi-insider.

The Determinants of Foreign Exchange Intervention by Central Banks: Evidence from Australia

Intervention by the Reserve Bank of Australia on foreign exchange markets from 1983 to 1997 is conjectured to have been determined by exchange rate trend correction, exchange rate volatility smoothing, the U.S. and Australian overnight interest rate differentials, profitability and foreign currency reserve inventory considerations. Using Probit and friction models, we show that these factors were significant influences on intervention behaviour. Consistent with the constraint of intervening only when a clear trend is apparent, we find that above average measures of deviations from trend and of volatility muted the response of the Reserve Bank.

The economics of selection of mail orders

We discuss the economics of selection of mail orders involving pricing and inventory considerations. We use a probabilistic approach to account for customer choice uncertainty, and offer an approximate approach to account for time uncertainty and model specification errors. The model makes use of the famous “newsboy” problem from inventory theory to solve for the optimal order quantity. The approach is demonstrated on a real application in the collectible industry involving realistic data.

The Microstructure of Currency Markets: An Empirical Model of Intra-day Return and Bid-Ask Spread Behavior

This paper analyzes the intra-day relationship between bid-ask spreads and “market” return volatility for U.S. Dollar/Deutschemark quotes. We are able to identify a statistically and economically significant “Reverse U-shaped” pattern in the bid-offer spread in 1996. Tests of the stability and ordering of “market” volatility, performed across several different fractions of the day, reveal that variances of intra-day returns are heterogeneous and ordered, declining around the Asian lunch break, increasing steadily during the London morning trading hours, peaking at the opening of New York to subsequently fall with the closing of the European markets. Results also indicate that “market” volatility is significantly higher during intra-day versus overnight periods. Then, we introduce a structural model that attempts to explain those empirical regularities by capturing some currency-specific features of the data: possibly asymmetric and stochastic trading cost structure, discrete directional updates and parameters’ temporal heterogeneity, and by relating the bid-ask spread to different sources of random noise. We evaluate these parameters via GMM using a set of convenient unconditional intra-day moments implied by the basic configuration of the model. Analysis of the resulting estimated patterns reveals that trading costs play a significant role in explaining the intra-day variability of bid and offer currency returns. Inventory considerations appear to be more relevant in the trading morning, while the perceived risk of arrival of informed trades seems more likely to affect the dealers’ cost structure in the afternoon. The contribution of the “true” currency risk to the total variability of posted bid and ask quotes’ returns is not surprisingly highest with the opening of the European markets.

Optimal Design of Internet-Based Auctions

Online auctions are a profitable, exciting, and dynamic part of electronic commerce, and behave in ways, which do not match classical auction theory. This paper models an online auction in terms of a Markov chain on a state space defined by the current price of the item and the number of bidders who have been previously “bumped”. It provides a mathematical model, some approximations, which were necessary to convert it into a tractable problem and solutions to a small and a medium-sized theoretical auction. The model results were validated through a comparison with real-world online auction data, showing promise as a predictor of final auction prices. The results of the auction model are also useful in solving an optimization problem that incorporates inventory management considerations in determining optimal auction size.

A global perspective on the Scottish Caledonides

ABSTRACTThe Scottish Caledonides constitute less than 10% of the length of the Caledonian-Appalachian orogen, the rocks of which define one major margin of the Laurentian craton in Neoproterozoic-Palaeozoic times. Scotland was located, however, in a critical position at the tip of a major cratonic promontory bounded by the Caledonian and Appalachian segments of that margin. Isotopic dates from minerals and rocks collected in the Scottish Highlands have been regarded for 40 years as indicating a Neoproterozoic history of compressive orogenesis that is absent in N America and Greenland. They have therefore been taken by some authors to indicate an origin exotic to Laurentia for rocks of the Northern and Grampian Highlands S and E of the Moine thrust belt. An alternative explanation is that the Neoproterozoic rocks in the Scottish Highlands are all related to the two-stage ‘breakout’ of a discrete rift-bounded Laurentian continent from the core of the Rodinian supercontinent, believed to have assembled at the end of the Mesoproterozoic.Traditional reconstructions of the late Neoproterozoic–Early Palaeozoic Earth oppose the proto-Caledonian/Appalachian margin of Laurentia and the W African craton of the newly assembled Gondwanaland. However, consideration of the global inventory of late Precambrian rifted margins, their relation to Grenvillian orogenic belts and of scale, leads to the hypothesis that the conjugate was the proto-Andean margin of S America. Recent recognition that the Cambrian and Lower Ordovician strata of the northwestern Argentine Precordillera and their underlying Grenvillian basement are unquestionably of Laurentian derivation, while not definitive, does point in this direction. If correct, this means that even the presence of Neoproterozoic orogenesis need not imply an exotic origin, as Neoproterozoic orogens are widespread in S America.Traditional models show an Early Ordovician lapetus ocean basin approximately 4500 km wide, but the remarkably synchronous Ordovician collision of arcs and other terranes with the Laurentian and Gondwanan cratons from Argentina to the British Isles, suggests that this premise may be incorrect. The Appalachian–Caledonian orogen may rather have resulted from close and complex tectonic interaction between Laurentia and Gondwana, involving intervening volcanic arcs and other terranes. The interaction may have taken place during a clockwise transit of Laurentia around the proto-Andean margin to its late Caledonian–Scandian collision with Baltica, and the final suturing of Pangaea at the close of the Palaeozoic era. A modern analogue may be the interaction between Australia and Asia, involving intervening volcanic arcs and other terranes of the western Pacific Ocean basin, from ~ 50 Ma through the Present, and into the future.

Design of an Automated Shop Floor Material Handling System with Inventory Considerations

Material handling systems are almost always intertwined with the production system they serve, but problems at this interface are rarely considered together. This paper develops a model that explicitly considers the costs of material handling and inventory to simultaneously design a material handling system and set shop floor inventory policy. The research was inspired by material handling problems we observed at computer manufacturing companies such as Apple Computer and Hewlett Packard Company. Shop floor inventory policies are often a result of trial and error or simple usage calculations—and material handling system design is usually addressed given an existing inventory policy. However, a tradeoff exists between shop floor inventory policy (reorder quantities and safety stock amounts) and demands for material handling. Inventory decisions can have a particularly large impact on cost when an automated material handling system, such as an automated guided vehicle system, is used to deliver materials. This paper develops a material handling/inventory system design model that is a nonlinear mixed integer program with nonlinear constraints, and presents a solution approach based on decomposition. Computational results show that simultaneous consideration of inventory policy and material handling system design can lead to significant reductions in overall production cost.

BREAK-EVEN POINT ANALYSIS AND PROFIT MAXIMIZATION WITH THE EXISTENCE OF INVENTORY, OBSOLESENCE OF THE INVENTORY AND THE EXISTENCE OF ESCAPED PROFITS

The purpose of the present paper is to expand on the algebraic break-even point analysis relaxing the linearity assumption. Moreover, the model developed in the paper takes into account two potential situations concerning the volume of production: Production exceeds demand, a situation which bears implications for inventory considerations, i.e., part of the overheads should be assigned to inventories, and Demand exceeds production, a situation that necessitates lost profit considerations since the volume of production is insufficient to cover the demand. The inclusion of demand considerations into the model results in profit maximization conditions that conform to real - world situations and therefore, provides management with better insights as to what actions should be undertaken

Integrating inventory impacts into a fixed-charge model for locating distribution centers

Abstract An important question in the design of efficient logistics systems is the identficaton of locations for distribution centers. Optimal designs should be based on consideration of inventory, transportation, construction and operating costs. This paper describes a method for including inventory costs within a fixed-charge facility location model, allowing such a model to be used more effectively for the development of optimal system designs. A realistic application of the model is discussed.

Applying the Queueing Theory Approach to Determine the Most Economical Number of Trucks Matching Shovel for Overburden Removal in a Coal Mine

On a given project involving overburden removal, the most economical number of trucks is the number that will give the lowest cost per cubic meter of waste, considering the combined cost of the shovel and the trucks. Additionally, effective and efficient haulage systems can only be developed through a detailed consideration of inventory, waiting line, allocation and replacement processes in a system. Otherwise, overloads and production bottlenecks will result at unexpected places in the mining system. Large numbers of heavy earth-moving equipment have been analyzed so that the required production targets would be achieved. Because of the huge investment involved, no mine design engineer can accept equipment sitting idle unnecessarily. For this reason, it is unavoidable that the proper matching of equipment has to be considered during the selection process. Within the scope of this paper, the most economical number of trucks matching a shovel has been evaluated and then compared in terms of cost per cubic meter of material.