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Approximation algorithms for optimal purchase/inventory policy when purchase price and demand are stochastic

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Author

Summary, in English

We consider a purchase/inventory control problem in which the purchase price and demand are stochastic, a common situation encountered by firms that replenish in a foreign currency or from commodity markets. More specifically, we assume that the demand follows a Poisson arrival process and that the log-price evolves according to a general Wiener process. Under these circumstances, the optimal policy is a state dependent base-stock policy that can be described as a series of threshold prices. An iterative procedure for determining the optimal thresholds has been derived earlier but, even for the simplest price process, the solution quickly becomes numerically intractable. To deal with this, we propose an approximation that allows us to derive simple heuristics for finding thresholds that are close to optimal. For certain price processes the heuristics are just a series of closed-form expressions. The computational complexity is reduced significantly, and the numerical study shows that the new heuristics perform considerably better than earlier suggested heuristics.

Publishing year

2014

Language

English

Pages

1077-1095

Publication/Series

OR Spectrum: Quantitative Approaches in Management

Volume

36

Issue

4

Document type

Journal article

Publisher

Springer

Topic

  • Transport Systems and Logistics

Keywords

  • Stochastic purchase price
  • Inventory control
  • Approximation algorithms
  • Base-stock levels

Status

Published

ISBN/ISSN/Other

  • ISSN: 1436-6304