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Market-Based Solutions to Vital Economic Issues


Kenan Institute 2022 Annual Theme: Stakeholder Capitalism
Market-Based Solutions to Vital Economic Issues
Jul 1, 2013

Information-Sensitive Replacement When Records Are Inaccurate


Inspired by recent empirical work on inventory record inaccuracy, we consider a periodic review inventory system with imperfect inventory records and unobserved lost sales. Record inaccuracies are assumed to arrive via an error process that perturbs physical inventory but is unobserved by the inventory manager. The inventory manager maintains a probability distribution around the physical inventory level that he updates based on sales observations using Bayes Theorem. The focus of this study is on understanding, approximating, and evaluating optimal forward-looking replenishment in this environment. By analyzing one- and two-period versions of the problem, we demonstrate several mechanisms by which the error process and associated record inaccuracy can impact optimal replenishment. A myopic manager often feels the need to increase stock to handle the uncertainty of possible record inaccuracy. On the other hand, a forward-looking manager will stock less than a myopic manager, in part to improve information content for future decisions. Using an approximate partially observed dynamic programming policy and associated bound, we numerically corroborate our analytical findings and measure the effectiveness of an intelligent myopic heuristic. We find that the myopic heuristic is likely sufficiently good in practical settings targeting high service levels.



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