Inventory control under speculation: Myopic heuristics and exact procedures

We consider a periodic review inventory problem in which the purchasing cost exhibits a noticeable increase (deterministic or stochastic) in the second period and remains at the higher value for the remainder of the problem. (This simplification clarifies the nature of the myopic heuristic, but is not necessary for use of the heuristic in practice.) This results in a strategy that holds inventories due to speculation. We develop solution procedures to find the optimal inventory levels for both stationary and non-stationary demands. We establish that the problem with stochastic speculation behaves exactly like a problem with deterministic speculation with the same mean increase in price. We propose, based on the case of deterministic demands, simple myopic heuristics and study their effectiveness. We observe that these heuristics perform very well for exponential demands. However, for the case of uniform demands these heuristics are most effective when the increase in price is large compared to the holding cost.