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Papers by Kevin Shang

Research paper thumbnail of Inventory Models with Financial Flows

Social Science Research Network, 2022

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Research paper thumbnail of Bayesian Dynamic Pricing and Subscription Period Selection with Unknown Customer Utility

SSRN Electronic Journal

We consider a service provider offering a subscription service to customers over a multi-period p... more We consider a service provider offering a subscription service to customers over a multi-period planning horizon. The customers decide whether to subscribe according to a utility model that represents their preferences for the service. The provider has a prior belief about the customer utility model, and updates its belief based on the transaction data of new customers and the usage data of existing subscribers. The provider aims to minimize its regret, namely the expected profit loss relative to a clairvoyant who knows the customer utility model. To analyze regret, we first study the clairvoyant's full-information problem. The resulting dynamic program, however, suffers from the curse of dimensionality. We develop a customer-centric approach to resolve this issue and obtain the optimal policy for the full-information problem. This approach balances the provider's immediate and future profits from an individual customer. When the provider does not have full information, we find that the simple and commonly used certainty-equivalence policy, which learns only passively, exhibits poor performance. We illustrate that this can be due to incomplete or slow learning, but can also occur because of offering a suboptimal contract with a long subscription period at the beginning. We propose a two-phase learning policy that first focuses on information accumulation and then profit maximization. We show that our policy achieves asymptotically optimal performance with its regret growing logarithmically in the planning horizon. Our results indicate that the provider should be cautious about offering a long subscription period when it is uncertain about customer preferences.

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Research paper thumbnail of Taylor Approximation of Inventory Policies for One-Warehouse, Multi-Retailer Systems with Demand Feature Information

SSRN Electronic Journal, 2021

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Research paper thumbnail of Managing Inventory for a Multidivisional Firm with Cash Pooling

Found. Trends Technol. Inf. Oper. Manag., 2017

We consider a multi-divisional firm in which each division replenishes its inventory and the head... more We consider a multi-divisional firm in which each division replenishes its inventory and the headquarter coordinates the cash flow through a master account over a finite horizon. The demands of the divisions are stochastic and may be correlated. The objective is to find an optimal joint inventory replenishment and cash retention policy which maximizes the firm’s working capital. We show that this problem is equivalent to minimizing the total system cost. Due to curse of dimensionality, the optimal policy is difficult to obtain. Nevertheless, we characterize the properties of the optimal policy and develop a simple heuristic that possesses these properties. A numerical study shows that the heuristic is near-optimal. We explore managerial insights through the heuristic. Among others, we find that the value of cash pooling is most significant when the demands of the divisions are negatively correlated.

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Research paper thumbnail of Wait Time Based Pricing for Queues with Customer-Chosen Service Times

SSRN Electronic Journal, 2020

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Research paper thumbnail of Investments in Renewable and Conventional Energy: The Role of Operational Flexibility

Manufacturing & Service Operations Management, 2020

Problem definition: There is an ongoing debate on how providing a subsidy for one energy source a... more Problem definition: There is an ongoing debate on how providing a subsidy for one energy source affects the investment level of other sources. Academic/practical relevance: To investigate this issue, we study a capacity investment problem for a utility firm that invests in renewable and conventional energy, with a consideration of two critical factors. First, conventional sources have different levels of operational flexibility—inflexible (e.g., nuclear and coal) and flexible (e.g., natural gas). Second, random renewable energy supply and electricity demand are correlated and nonstationary. Methodology: We model this problem as a two-stage stochastic program in which a utility firm first determines the capacity investment levels followed by the dispatch quantities of energy sources to minimize the sum of investment and generation-related costs. Results: We derive the optimal capacity portfolio to characterize the interactions between renewable and conventional sources. Policy implic...

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Research paper thumbnail of Impact of Information Asymmetry and Limited Production Capacity on Business Interruption Insurance

SSRN Electronic Journal, 2018

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Research paper thumbnail of Cash Beer Game

Foundations and Trends® in Technology, Information and Operations Management, 2019

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Research paper thumbnail of Measuring the Bullwhip Effect: Discrepancy and Alignment Between Information and Material Flows

Manufacturing & Service Operations Management, 2017

The bullwhip effect is a phenomenon commonly observed in supply chains. It describes how demand v... more The bullwhip effect is a phenomenon commonly observed in supply chains. It describes how demand variance amplifies from a downstream site to an upstream site due to demand information distortion. Two different bullwhip effect measures have been used in the literature. Theorists analyze the bullwhip effect based on the information flow (i.e., order and demand information), whereas most empiricists measure it according to the material flow (i.e., shipment and sales data). It is unclear how much the discrepancy between these two measures is, and, if significant, how to reconcile the discrepancy. In this paper, we illustrate and quantify the discrepancy under three inventory systems. For the system with stationary demand and ample supply, we show that the bullwhip effect measure based on the material-flow data is always greater than that based on the information flow. For the system with correlated demand and for the system with supply shortages, we derive conditions under which the mat...

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Research paper thumbnail of A Simple Heuristic for Joint Inventory and Pricing Models with Lead Time and Backorders

Management Science, 2016

We study a joint inventory and pricing problem in a single-stage system with a positive lead time... more We study a joint inventory and pricing problem in a single-stage system with a positive lead time. We consider both additive and multiplicative demand forms. This problem is, in general, intractable due to its computational complexity. We develop a simple heuristic that resolves this issue. The heuristic involves a myopic pricing policy that generates each period’s price as a function of the initial inventory level and a base-stock policy for inventory replenishment. In each period, the firm monitors its so-called price-deflated inventory position and places an order to reach a target base-stock level. The price-deflated inventory position weights the on-hand and pipeline inventory according to a factor that reflects the sensitivity of price to the net inventory level. To assess the effectiveness of our heuristic, we construct an upper bound to the exact system. The upper bound is based on an information-relaxation approach and involves a penalty function derived from the proposed h...

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Research paper thumbnail of Optimizing Reorder Intervals for Two-Echelon Distribution Systems with Stochastic Demand

Operations Research, 2015

We consider a periodic-review inventory system in which N non-identical retailers replenish from ... more We consider a periodic-review inventory system in which N non-identical retailers replenish from a warehouse, which further replenishes from an outside vendor with ample supply. Each facility faces Poisson demand and replenishes according to a base-stock policy in a fixed time interval. Fixed costs are incurred for placing an order. The warehouse fills the retailers’ orders in the same sequence as the occurrence of the demand at the retailers. The objective is to minimize the average system cost per period. This paper develops an evaluation scheme and provides a method to obtain the optimal base-stock levels and reorder intervals. Specifically, with fixed reorder intervals, we show that the optimal base-stock levels can be obtained by generalizing the result in the literature. To find the optimal reorder intervals, we first allocate the total system cost to each facility and then construct a lower bound to the allocated facility cost. These lower bound functions, which are separable...

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Research paper thumbnail of Impact of Electricity Pricing Policy on Renewable Energy Investments and Carbon Emissions

SSRN Electronic Journal, 2014

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Research paper thumbnail of Measuring the Bullwhip Effect with Material Flow Data: Biases and Remedies

SSRN Electronic Journal, 2014

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Research paper thumbnail of Managing Inventory for Entrepreneurial Firms with Trade Credit and Payment Defaults

SSRN Electronic Journal, 2013

This paper considers an entrepreneurial firm that periodically orders inventory to satisfy demand... more This paper considers an entrepreneurial firm that periodically orders inventory to satisfy demand in a finite horizon. The firm offers trade credit to its customer while receiving one from its supplier. In addition to standard inventory-related costs, cash-related costs are incurred in each period. The cash-related cost is composed of a default penalty cost due to a cash shortage and an interest gain (negative cost) due to excess cash after inventory payments. The objective is to obtain an inventory policy that maximizes the working capital at the end of the horizon. We show that this problem is equivalent to that of minimizing the total inventory related cost and the cash-related cost in the horizon. The model with ample cash reduces to the traditional inventory model. For the general model, we prove that a state-dependent policy is optimal. To facilitate implementation and reveal insights, we consider a simplified model in which a myopic policy is optimal. A numerical study suggests that the myopic policy is effective for the original system. The myopic policy generalizes the classic base-stock policy and resembles practical working capital management under which firms make inventory decisions according to their working capital status. The policy parameters have closed-form expressions, which show the impact of demand and cost parameters on the inventory decision. Our study assesses the value of considering financial flows when the firm makes the inventory decision and reveals insights that are consistent with empirical findings in the literature.

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Research paper thumbnail of Joint Inventory and Cash Management for Multi-Divisional Supply Chains

SSRN Electronic Journal, 2013

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Research paper thumbnail of Serial Supply Chains with Economies of Scale: Bounds and Approximations

Operations Research, 2007

We consider two models of stochastic serial inventory systems with economies of scale for which t... more We consider two models of stochastic serial inventory systems with economies of scale for which the forms of optimal policies are known. In the first model, each stage has a fixed-order quantity, while in the second model, there is a fixed-order cost for external supplies. For each model, we show that the optimal policy parameters can be bounded and approximated by a series of independent, single-stage optimal policy parameters. We further construct closed-form bounds and approximations for the single-stage solutions and apply them to the serial systems. These results provide simple and effective solutions that will help to facilitate implementations in practice. They also allow us to see the connections between the serial and single-stage systems and sharpen our intuition on optimal policy parameters and system behavior.

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Research paper thumbnail of Note: A Simple Heuristic for Serial Inventory Systems with Fixed Order Costs

Operations Research, 2008

We propose a heuristic for finding base order quantities for stochastic inventory models. The heu... more We propose a heuristic for finding base order quantities for stochastic inventory models. The heuristic includes two steps. The first clusters the stages according to cost parameters. The second solves a single-stage problem for each cluster with the original problem data. In a numerical study, we show that the heuristic is near optimal.

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Research paper thumbnail of Erratum to Bounds in “Serial Production/Distribution Systems Under Service Constraints”

Manufacturing & Service Operations Management, 2003

We noticed an error in the upper bound on the optimal system stock in Boyaci and Gallego (2001). ... more We noticed an error in the upper bound on the optimal system stock in Boyaci and Gallego (2001). We provide a procedure to compute the correct bound.

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Research paper thumbnail of A Closed-Form Approximation for Serial Inventory Systems and Its Application to System Design

Manufacturing & Service Operations Management, 2006

We analyze a serial base-stock inventory model with Poisson demand and a fill-rate constraint. Ou... more We analyze a serial base-stock inventory model with Poisson demand and a fill-rate constraint. Our objective is to gain insights into the linkage between the stages to facilitate optimal system design and decentralized system control. To this end, we develop a closed-form approximation for the optimal base-stock levels. The development consists of two key steps: (1) convert the service-constrained model into a backorder cost model by imputing an appropriate backorder cost rate, and then adapt the single-stage approximation developed for the latter, and (2) use a logistic distribution to approximate the lead-time demand distribution in the single-stage approximation obtained in (1) to yield closed-form expressions. We then use the closed-form expressions to conduct sensitivity analyses and establish qualitative properties on system design issues, such as optimal total system stock, stock positioning, and internal fill rates. The closed-form approximation and most of the qualitative p...

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Research paper thumbnail of Inspection and Replenishment Policies for Systems with Inventory Record Inaccuracy

Manufacturing & Service Operations Management, 2007

For many companies, inventory record inaccuracy is a major obstacle to achieving operational exce... more For many companies, inventory record inaccuracy is a major obstacle to achieving operational excellence. In this paper, we consider an inventory system in which inventory records are inaccurate. The manager makes inventory inspection and replenishment decisions at the beginning of each period. There is a cost associated with each inspection. If an inspection is performed, inventory records are aligned with physical inventory. The objective is to develop a joint inspection and replenishment policy that minimizes total costs in a finite horizon. We prove that an inspection adjusted base-stock (IABS) policy is optimal for the single-period problem. In the finite-horizon problem, we show that the IABS policy is near optimal in a numerical study. Under this policy, the manager performs an inspection if the inventory recorded is less than a threshold level, and orders up to a base-stock level that depends on the number of periods since the last inspection. The prevalent approach to deal w...

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Research paper thumbnail of Inventory Models with Financial Flows

Social Science Research Network, 2022

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Research paper thumbnail of Bayesian Dynamic Pricing and Subscription Period Selection with Unknown Customer Utility

SSRN Electronic Journal

We consider a service provider offering a subscription service to customers over a multi-period p... more We consider a service provider offering a subscription service to customers over a multi-period planning horizon. The customers decide whether to subscribe according to a utility model that represents their preferences for the service. The provider has a prior belief about the customer utility model, and updates its belief based on the transaction data of new customers and the usage data of existing subscribers. The provider aims to minimize its regret, namely the expected profit loss relative to a clairvoyant who knows the customer utility model. To analyze regret, we first study the clairvoyant's full-information problem. The resulting dynamic program, however, suffers from the curse of dimensionality. We develop a customer-centric approach to resolve this issue and obtain the optimal policy for the full-information problem. This approach balances the provider's immediate and future profits from an individual customer. When the provider does not have full information, we find that the simple and commonly used certainty-equivalence policy, which learns only passively, exhibits poor performance. We illustrate that this can be due to incomplete or slow learning, but can also occur because of offering a suboptimal contract with a long subscription period at the beginning. We propose a two-phase learning policy that first focuses on information accumulation and then profit maximization. We show that our policy achieves asymptotically optimal performance with its regret growing logarithmically in the planning horizon. Our results indicate that the provider should be cautious about offering a long subscription period when it is uncertain about customer preferences.

Bookmarks Related papers MentionsView impact

Research paper thumbnail of Taylor Approximation of Inventory Policies for One-Warehouse, Multi-Retailer Systems with Demand Feature Information

SSRN Electronic Journal, 2021

Bookmarks Related papers MentionsView impact

Research paper thumbnail of Managing Inventory for a Multidivisional Firm with Cash Pooling

Found. Trends Technol. Inf. Oper. Manag., 2017

We consider a multi-divisional firm in which each division replenishes its inventory and the head... more We consider a multi-divisional firm in which each division replenishes its inventory and the headquarter coordinates the cash flow through a master account over a finite horizon. The demands of the divisions are stochastic and may be correlated. The objective is to find an optimal joint inventory replenishment and cash retention policy which maximizes the firm’s working capital. We show that this problem is equivalent to minimizing the total system cost. Due to curse of dimensionality, the optimal policy is difficult to obtain. Nevertheless, we characterize the properties of the optimal policy and develop a simple heuristic that possesses these properties. A numerical study shows that the heuristic is near-optimal. We explore managerial insights through the heuristic. Among others, we find that the value of cash pooling is most significant when the demands of the divisions are negatively correlated.

Bookmarks Related papers MentionsView impact

Research paper thumbnail of Wait Time Based Pricing for Queues with Customer-Chosen Service Times

SSRN Electronic Journal, 2020

Bookmarks Related papers MentionsView impact

Research paper thumbnail of Investments in Renewable and Conventional Energy: The Role of Operational Flexibility

Manufacturing & Service Operations Management, 2020

Problem definition: There is an ongoing debate on how providing a subsidy for one energy source a... more Problem definition: There is an ongoing debate on how providing a subsidy for one energy source affects the investment level of other sources. Academic/practical relevance: To investigate this issue, we study a capacity investment problem for a utility firm that invests in renewable and conventional energy, with a consideration of two critical factors. First, conventional sources have different levels of operational flexibility—inflexible (e.g., nuclear and coal) and flexible (e.g., natural gas). Second, random renewable energy supply and electricity demand are correlated and nonstationary. Methodology: We model this problem as a two-stage stochastic program in which a utility firm first determines the capacity investment levels followed by the dispatch quantities of energy sources to minimize the sum of investment and generation-related costs. Results: We derive the optimal capacity portfolio to characterize the interactions between renewable and conventional sources. Policy implic...

Bookmarks Related papers MentionsView impact

Research paper thumbnail of Impact of Information Asymmetry and Limited Production Capacity on Business Interruption Insurance

SSRN Electronic Journal, 2018

Bookmarks Related papers MentionsView impact

Research paper thumbnail of Cash Beer Game

Foundations and Trends® in Technology, Information and Operations Management, 2019

Bookmarks Related papers MentionsView impact

Research paper thumbnail of Measuring the Bullwhip Effect: Discrepancy and Alignment Between Information and Material Flows

Manufacturing & Service Operations Management, 2017

The bullwhip effect is a phenomenon commonly observed in supply chains. It describes how demand v... more The bullwhip effect is a phenomenon commonly observed in supply chains. It describes how demand variance amplifies from a downstream site to an upstream site due to demand information distortion. Two different bullwhip effect measures have been used in the literature. Theorists analyze the bullwhip effect based on the information flow (i.e., order and demand information), whereas most empiricists measure it according to the material flow (i.e., shipment and sales data). It is unclear how much the discrepancy between these two measures is, and, if significant, how to reconcile the discrepancy. In this paper, we illustrate and quantify the discrepancy under three inventory systems. For the system with stationary demand and ample supply, we show that the bullwhip effect measure based on the material-flow data is always greater than that based on the information flow. For the system with correlated demand and for the system with supply shortages, we derive conditions under which the mat...

Bookmarks Related papers MentionsView impact

Research paper thumbnail of A Simple Heuristic for Joint Inventory and Pricing Models with Lead Time and Backorders

Management Science, 2016

We study a joint inventory and pricing problem in a single-stage system with a positive lead time... more We study a joint inventory and pricing problem in a single-stage system with a positive lead time. We consider both additive and multiplicative demand forms. This problem is, in general, intractable due to its computational complexity. We develop a simple heuristic that resolves this issue. The heuristic involves a myopic pricing policy that generates each period’s price as a function of the initial inventory level and a base-stock policy for inventory replenishment. In each period, the firm monitors its so-called price-deflated inventory position and places an order to reach a target base-stock level. The price-deflated inventory position weights the on-hand and pipeline inventory according to a factor that reflects the sensitivity of price to the net inventory level. To assess the effectiveness of our heuristic, we construct an upper bound to the exact system. The upper bound is based on an information-relaxation approach and involves a penalty function derived from the proposed h...

Bookmarks Related papers MentionsView impact

Research paper thumbnail of Optimizing Reorder Intervals for Two-Echelon Distribution Systems with Stochastic Demand

Operations Research, 2015

We consider a periodic-review inventory system in which N non-identical retailers replenish from ... more We consider a periodic-review inventory system in which N non-identical retailers replenish from a warehouse, which further replenishes from an outside vendor with ample supply. Each facility faces Poisson demand and replenishes according to a base-stock policy in a fixed time interval. Fixed costs are incurred for placing an order. The warehouse fills the retailers’ orders in the same sequence as the occurrence of the demand at the retailers. The objective is to minimize the average system cost per period. This paper develops an evaluation scheme and provides a method to obtain the optimal base-stock levels and reorder intervals. Specifically, with fixed reorder intervals, we show that the optimal base-stock levels can be obtained by generalizing the result in the literature. To find the optimal reorder intervals, we first allocate the total system cost to each facility and then construct a lower bound to the allocated facility cost. These lower bound functions, which are separable...

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Research paper thumbnail of Impact of Electricity Pricing Policy on Renewable Energy Investments and Carbon Emissions

SSRN Electronic Journal, 2014

Bookmarks Related papers MentionsView impact

Research paper thumbnail of Measuring the Bullwhip Effect with Material Flow Data: Biases and Remedies

SSRN Electronic Journal, 2014

Bookmarks Related papers MentionsView impact

Research paper thumbnail of Managing Inventory for Entrepreneurial Firms with Trade Credit and Payment Defaults

SSRN Electronic Journal, 2013

This paper considers an entrepreneurial firm that periodically orders inventory to satisfy demand... more This paper considers an entrepreneurial firm that periodically orders inventory to satisfy demand in a finite horizon. The firm offers trade credit to its customer while receiving one from its supplier. In addition to standard inventory-related costs, cash-related costs are incurred in each period. The cash-related cost is composed of a default penalty cost due to a cash shortage and an interest gain (negative cost) due to excess cash after inventory payments. The objective is to obtain an inventory policy that maximizes the working capital at the end of the horizon. We show that this problem is equivalent to that of minimizing the total inventory related cost and the cash-related cost in the horizon. The model with ample cash reduces to the traditional inventory model. For the general model, we prove that a state-dependent policy is optimal. To facilitate implementation and reveal insights, we consider a simplified model in which a myopic policy is optimal. A numerical study suggests that the myopic policy is effective for the original system. The myopic policy generalizes the classic base-stock policy and resembles practical working capital management under which firms make inventory decisions according to their working capital status. The policy parameters have closed-form expressions, which show the impact of demand and cost parameters on the inventory decision. Our study assesses the value of considering financial flows when the firm makes the inventory decision and reveals insights that are consistent with empirical findings in the literature.

Bookmarks Related papers MentionsView impact

Research paper thumbnail of Joint Inventory and Cash Management for Multi-Divisional Supply Chains

SSRN Electronic Journal, 2013

Bookmarks Related papers MentionsView impact

Research paper thumbnail of Serial Supply Chains with Economies of Scale: Bounds and Approximations

Operations Research, 2007

We consider two models of stochastic serial inventory systems with economies of scale for which t... more We consider two models of stochastic serial inventory systems with economies of scale for which the forms of optimal policies are known. In the first model, each stage has a fixed-order quantity, while in the second model, there is a fixed-order cost for external supplies. For each model, we show that the optimal policy parameters can be bounded and approximated by a series of independent, single-stage optimal policy parameters. We further construct closed-form bounds and approximations for the single-stage solutions and apply them to the serial systems. These results provide simple and effective solutions that will help to facilitate implementations in practice. They also allow us to see the connections between the serial and single-stage systems and sharpen our intuition on optimal policy parameters and system behavior.

Bookmarks Related papers MentionsView impact

Research paper thumbnail of Note: A Simple Heuristic for Serial Inventory Systems with Fixed Order Costs

Operations Research, 2008

We propose a heuristic for finding base order quantities for stochastic inventory models. The heu... more We propose a heuristic for finding base order quantities for stochastic inventory models. The heuristic includes two steps. The first clusters the stages according to cost parameters. The second solves a single-stage problem for each cluster with the original problem data. In a numerical study, we show that the heuristic is near optimal.

Bookmarks Related papers MentionsView impact

Research paper thumbnail of Erratum to Bounds in “Serial Production/Distribution Systems Under Service Constraints”

Manufacturing & Service Operations Management, 2003

We noticed an error in the upper bound on the optimal system stock in Boyaci and Gallego (2001). ... more We noticed an error in the upper bound on the optimal system stock in Boyaci and Gallego (2001). We provide a procedure to compute the correct bound.

Bookmarks Related papers MentionsView impact

Research paper thumbnail of A Closed-Form Approximation for Serial Inventory Systems and Its Application to System Design

Manufacturing & Service Operations Management, 2006

We analyze a serial base-stock inventory model with Poisson demand and a fill-rate constraint. Ou... more We analyze a serial base-stock inventory model with Poisson demand and a fill-rate constraint. Our objective is to gain insights into the linkage between the stages to facilitate optimal system design and decentralized system control. To this end, we develop a closed-form approximation for the optimal base-stock levels. The development consists of two key steps: (1) convert the service-constrained model into a backorder cost model by imputing an appropriate backorder cost rate, and then adapt the single-stage approximation developed for the latter, and (2) use a logistic distribution to approximate the lead-time demand distribution in the single-stage approximation obtained in (1) to yield closed-form expressions. We then use the closed-form expressions to conduct sensitivity analyses and establish qualitative properties on system design issues, such as optimal total system stock, stock positioning, and internal fill rates. The closed-form approximation and most of the qualitative p...

Bookmarks Related papers MentionsView impact

Research paper thumbnail of Inspection and Replenishment Policies for Systems with Inventory Record Inaccuracy

Manufacturing & Service Operations Management, 2007

For many companies, inventory record inaccuracy is a major obstacle to achieving operational exce... more For many companies, inventory record inaccuracy is a major obstacle to achieving operational excellence. In this paper, we consider an inventory system in which inventory records are inaccurate. The manager makes inventory inspection and replenishment decisions at the beginning of each period. There is a cost associated with each inspection. If an inspection is performed, inventory records are aligned with physical inventory. The objective is to develop a joint inspection and replenishment policy that minimizes total costs in a finite horizon. We prove that an inspection adjusted base-stock (IABS) policy is optimal for the single-period problem. In the finite-horizon problem, we show that the IABS policy is near optimal in a numerical study. Under this policy, the manager performs an inspection if the inventory recorded is less than a threshold level, and orders up to a base-stock level that depends on the number of periods since the last inspection. The prevalent approach to deal w...

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