Jia Yan John Liu () (School of Economic Sciences, Washington State University)
Abstract
We show in this paper that instability is an intrinsic cause of production variability in a dynamic inventory system. We first show that a unique stationary optimal policy exists for both full-backlog and lost-sales case and under the policy a firm replenishes its inventory to a constant target level. We then express the constant inventory target as the unique steady state of the Euler’s equation governing the dynamics of target inventories. We finally show that the Euler’s equation is locally instable at the steady state but a sufficiently large refund to unsold inventory in lost-sales case can stabilize the inventory system.
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Publisher Info
Paper provided by School of Economic Sciences, Washington State University in its series Working Papers with number
2008-23.
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