Note: optimal ordering decisions with uncertain cost and demand forecast updating

Haresh Gurnani, Christopher S. Tang

Research output: Contribution to journalArticle

167 Scopus citations

Abstract

We determine the optimal ordering policy for a retailer who has two instants to order a seasonal product from a manufacturer prior to a single selling season. While the demand is uncertain, the retailer can improve the forecast by utilizing the market signals observed between the first and second instants. However, because of the nature of the manufacturing environment, the unit cost at the second instant is uncertain and could be higher (or lower) than the unit cost at the first instant. To determine the profit-maximizing ordering strategies at both instants, the retailer has to evaluate the trade-off between a more accurate forecast and a potentially higher unit cost at the second instant. We present a nested newsvendor model for determining the optimal order quantity at each instant and characterize the conditions under which it is optimal for the retailer to delay its order until the second instant.

Original languageEnglish (US)
Pages (from-to)1456-1462
Number of pages7
JournalManagement science
Volume45
Issue number10
DOIs
StatePublished - Oct 1999

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ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research

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