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Note: Optimal Ordering Decisions with Uncertain Cost and Demand Forecast Updating

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Author Info

  • Haresh Gurnani

    (Department of Information and Systems Management, The Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong)

  • Christopher S. Tang

    (Anderson Graduate School of Management, University of California, Los Angeles, Los Angeles, California 90095)

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    Abstract

    We determine the optimal ordering policy for a retailer who has two instants to order a seasonal product from a manufacturer prior to a single selling season. While the demand is uncertain, the retailer can improve the forecast by utilizing the market signals observed between the first and second instants. However, because of the nature of the manufacturing environment, the unit cost at the second instant is uncertain and could be higher (or lower) than the unit cost at the first instant. To determine the profit-maximizing ordering strategies at both instants, the retailer has to evaluate the trade-off between a more accurate forecast and a potentially higher unit cost at the second instant. We present a nested newsvendor model for determining the optimal order quantity at each instant and characterize the conditions under which it is optimal for the retailer to delay its order until the second instant.

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    File URL: http://dx.doi.org/10.1287/mnsc.45.10.1456
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 45 (1999)
    Issue (Month): 10 (October)
    Pages: 1456-1462

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    Handle: RePEc:inm:ormnsc:v:45:y:1999:i:10:p:1456-1462

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    Related research

    Keywords: inventory; uncertain cost; demand forecast updating;

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    Cited by:
    1. Choi, Tsan-Ming, 2007. "Pre-season stocking and pricing decisions for fashion retailers with multiple information updating," International Journal of Production Economics, Elsevier, vol. 106(1), pages 146-170, March.
    2. Cheaitou, Ali & van Delft, Christian & Dallery, Yves & Jemai, Zied, 2009. "Two-period production planning and inventory control," International Journal of Production Economics, Elsevier, vol. 118(1), pages 118-130, March.
    3. Chen, Haoya & Chen, Jian & Chen, Youhua (Frank), 2006. "A coordination mechanism for a supply chain with demand information updating," International Journal of Production Economics, Elsevier, vol. 103(1), pages 347-361, September.
    4. Tang, Christopher S., 2006. "Perspectives in supply chain risk management," International Journal of Production Economics, Elsevier, vol. 103(2), pages 451-488, October.
    5. Oberlaender, Michael, 2011. "Dual sourcing of a newsvendor with exponential utility of profit," International Journal of Production Economics, Elsevier, vol. 133(1), pages 370-376, September.
    6. Choi, Tsan-Ming & Sethi, Suresh, 2010. "Innovative quick response programs: A review," International Journal of Production Economics, Elsevier, vol. 127(1), pages 1-12, September.
    7. Serel, Dogan A., 2009. "Optimal ordering and pricing in a quick response system," International Journal of Production Economics, Elsevier, vol. 121(2), pages 700-714, October.
    8. Thonemann, U. W., 2002. "Improving supply-chain performance by sharing advance demand information," European Journal of Operational Research, Elsevier, vol. 142(1), pages 81-107, October.
    9. Shen, Houcai & Pang, Zhan & Cheng, T.C.E., 2011. "The component procurement problem for the loss-averse manufacturer with spot purchase," International Journal of Production Economics, Elsevier, vol. 132(1), pages 146-153, July.
    10. Choi, Tsan-Ming & Chow, Pui-Sze, 2008. "Mean-variance analysis of Quick Response Program," International Journal of Production Economics, Elsevier, vol. 114(2), pages 456-475, August.

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