Optimal two-stage ordering policy with Bayesian information updating

Optimal two-stage ordering policy with Bayesian information updating

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Article ID: iaor20041468
Country: United Kingdom
Volume: 54
Issue: 8
Start Page Number: 846
End Page Number: 859
Publication Date: Aug 2003
Journal: Journal of the Operational Research Society
Authors: , ,
Abstract:

We investigate in this paper an optimal two-stage ordering policy for seasonal products. Before the selling season, a retailer can place orders for a seasonal product from her supplier at two distinct stages satisfying the lead-time requirement. Market information is collected at the first stage and is used to update the demand forecast at the second stage by using Bayesian approach. The ordering cost at the first stage is known but the ordering cost at the second stage is uncertain. A two-stage dynamic optimization problem is formulated and an optimal policy is derived using dynamic programming. The optimal ordering policy exhibits nice structural properties and can easily be implemented by a computer program. The detailed implementation scheme is proposed. The service level and profit uncertainty level under the optimal policy are discussed. Extensive numerical analyses are carried out to study the performance of the optimal policy.

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