So what is new in inventory models?
Posted by Sridhar Tayur on Fri, Feb 12, 2010 @ 02:07 AM
Inventory modeling in academia -- specifically, the analysis of discrete time models for production and inventories, deterministic and stochastic, multi-stage and single stage, stationary and non-stationary, uncapacitated and capacitated -- is about 60 years old. (I have been at it for 20 years now!) In fact, SmartOps Enterprise Inventory Optimization (EIO) product has benefited from this rich heritage (as the underlying framework of SmartOps EIO is a discrete time, finite horizon, non-stationary, capacitated, multi-echelon model with batch size restrictions and so on).
What are some recent research publications that are useful? Let me highlight one now -- co-authored with my PhD students Nihat Altintas (now at Credit Suisse on Wall Street, and we are now using our inventory modeling skills to improve high frequency automated proprietary program trading algorithms) and Feryal Erhun (now a faculty member at Stanford working with Intel on risk management and other topics) -- the study of quantity discounts under demand uncertainty: How should a supplier optimally design a discount scheme to nudge a buyer towards buying closer to truck load quantities, anticipating that the buyer (facing uncertain demand) will follow an optimal policy himself? This research was based on interactions with Heinz as well as Shaw's Supermarkets, and the paper is published in Management Science. If the optimal policy of such a model is too hard to implement in reality, what are simplified policies that can be implemented that perform reasonably well? How are quantity discount schemes related to minimum order contracts? What are the upstream consequences of a discount scheme in terms of propogation of uncertainty?
One very interesting new phenomenon we discover here is the opposite of the very famous bullwhip effect. As the end-item demand at the customer increases, the volatility of the orders to the supplier decreases! The much maligned batch sizing in the bullwhip literature may not be all evil after all. I hope you have fun reading the paper and enjoy the various insights (and some are perhaps initially counter-intuitive).