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Bayes Solution to Dynamic Inventory Models Under Unknown Demand Distribution

Author

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  • Katy S. Azoury

    (School of Business Administration and Economics, California State University, Northridge, California 91330)

Abstract

This paper considers the periodic review inventory problem for which one or more parameters of the demand distribution are unknown with a known prior distribution chosen from the natural conjugate family. The Bayesian formulation of this problem results in a dynamic program with a multi-dimensional state space. Two models are analysed: the depletive inventory model of consumable items and the nondepletive model of reparable items. For both models and for some specific demand distributions, it is shown that the solution of the Bayesian model can be reduced to that of solving another dynamic program with a one-dimensional state space. Moreover, an explicit form for the optimal Bayesian ordering policy is given in each case.

Suggested Citation

  • Katy S. Azoury, 1985. "Bayes Solution to Dynamic Inventory Models Under Unknown Demand Distribution," Management Science, INFORMS, vol. 31(9), pages 1150-1160, September.
  • Handle: RePEc:inm:ormnsc:v:31:y:1985:i:9:p:1150-1160
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    File URL: http://dx.doi.org/10.1287/mnsc.31.9.1150
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    References listed on IDEAS

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    1. Ian I. Mitroff, 1972. "The Myth of Objectivity OR Why Science Needs a New Psychology of Science," Management Science, INFORMS, vol. 18(10), pages 613-618, June.
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