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Note: Optimal Ordering Decisions with Uncertain Cost and Demand Forecast Updating

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  • Haresh Gurnani

    (Department of Information and Systems Management, The Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong)

  • Christopher S. Tang

    (Anderson Graduate School of Management, University of California, Los Angeles, Los Angeles, California 90095)

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.

Suggested Citation

  • Haresh Gurnani & Christopher S. Tang, 1999. "Note: Optimal Ordering Decisions with Uncertain Cost and Demand Forecast Updating," Management Science, INFORMS, vol. 45(10), pages 1456-1462, October.
    • Handle: RePEc:inm:ormnsc:v:45:y:1999:i:10:p:1456-1462
    DOI: 10.1287/mnsc.45.10.1456
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    References listed on IDEAS

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    1. Panagiotis Kouvelis & Genaro J. Gutierrez, 1997. "The Newsvendor Problem in a Global Market: Optimal Centralized and Decentralized Control Policies for a Two-Market Stochastic Inventory System," Management Science, INFORMS, vol. 43(5), pages 571-585, May.
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    5. Marshall Fisher & Ananth Raman, 1996. "Reducing the Cost of Demand Uncertainty Through Accurate Response to Early Sales," Operations Research, INFORMS, vol. 44(1), pages 87-99, February.
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