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On the relationship between entropy, demand uncertainty, and expected loss

Listed author(s):
  • Fleischhacker, Adam J.
  • Fok, Pak-Wing
Registered author(s):

    We analyze the effect of demand uncertainty, as measured by entropy, on expected costs in a stochastic inventory model. Existing models studying demand variability’s impact use either stochastic ordering techniques or use variance as a measure of uncertainty. Due to both axiomatic appeal and recent use of entropy in the operations management literature, this paper develops entropy’s use as a demand uncertainty measure. Our key contribution is an insightful proof quantifying how costs are non-increasing when entropy is reduced.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0377221715002076
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    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 245 (2015)
    Issue (Month): 2 ()
    Pages: 623-628

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    Handle: RePEc:eee:ejores:v:245:y:2015:i:2:p:623-628
    DOI: 10.1016/j.ejor.2015.03.014
    Contact details of provider: Web page: http://www.elsevier.com/locate/eor

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    1. Z. Jemai & F. Karaesmen, 2005. "The influence of demand variability on the performance of a make-to-stock queue," Post-Print hal-00126137, HAL.
    2. Andersson, Jonas & Jörnsten, Kurt & Nonås, Sigrid Lise & Sandal, Leif & Ubøe, Jan, 2013. "A maximum entropy approach to the newsvendor problem with partial information," European Journal of Operational Research, Elsevier, vol. 228(1), pages 190-200.
    3. Xu, Minghui & Chen, Youhua (Frank) & Xu, Xiaolin, 2010. "The effect of demand uncertainty in a price-setting newsvendor model," European Journal of Operational Research, Elsevier, vol. 207(2), pages 946-957, December.
    4. Terry A. Taylor & Wenqiang Xiao, 2010. "Does a Manufacturer Benefit from Selling to a Better-Forecasting Retailer?," Management Science, INFORMS, vol. 56(9), pages 1584-1598, September.
    5. Jing-Sheng Song, 1994. "The Effect of Leadtime Uncertainty in a Simple Stochastic Inventory Model," Management Science, INFORMS, vol. 40(5), pages 603-613, May.
    6. Jemai, Zied & Karaesmen, Fikri, 2005. "The influence of demand variability on the performance of a make-to-stock queue," European Journal of Operational Research, Elsevier, vol. 164(1), pages 195-205, July.
    7. Shuiabi, Eyas & Thomson, Vince & Bhuiyan, Nadia, 2005. "Entropy as a measure of operational flexibility," European Journal of Operational Research, Elsevier, vol. 165(3), pages 696-707, September.
    8. Kwak, Jin Kyung & Gavirneni, Srinagesh, 2011. "Retailer policy, uncertainty reduction, and supply chain performance," International Journal of Production Economics, Elsevier, vol. 132(2), pages 271-278, August.
    9. Ebrahimi, Nader & Maasoumi, Esfandiar & Soofi, Ehsan S., 1999. "Ordering univariate distributions by entropy and variance," Journal of Econometrics, Elsevier, vol. 90(2), pages 317-336, June.
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