A simulation-based approach to capturing auto-correlated demand parameter uncertainty in inventory management

A.E. Akçay, B. Biller, S. Tayur

Research output: Chapter in Book/Report/Conference proceedingConference contributionAcademicpeer-review

5 Citations (Scopus)
2 Downloads (Pure)

Abstract

We consider a repeated newsvendor setting where the parameters of the demand distribution are unknown, and we study the problem of setting inventory targets using only a limited amount of historical demand data. We assume that the demand process is autocorrelated and represented by an Autoregressive-To-Anything time series. We represent the marginal demand distribution with the highly flexible Johnson translation system that captures a wide variety of distributional shapes. Using a simulation-based sampling algorithm, we quantify the expected cost due to parameter uncertainty as a function of the length of the historical demand data, the critical fractile, the parameters of the marginal demand distribution, and the autocorrelation of the demand process. We determine the improved inventory-target estimate accounting for this parameter uncertainty via sample-path optimization.
Original languageEnglish
Title of host publicationProceedings of the 2012 Winter Simulation Conference (WSC), 9-12 December 2012, London, United Kingdom
Place of PublicationPiscataway
PublisherInstitute of Electrical and Electronics Engineers
Pages1-12
ISBN (Print)978-1-4673-4779-2
DOIs
Publication statusPublished - 2012

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