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End-of-Period vs. Continuous Accounting of Inventory-Related Costs

Author

Listed:
  • Nils Rudi

    (INSEAD, 77305 Fontainebleau, France)

  • Harry Groenevelt

    (Simon School of Business, University of Rochester, Rochester, New York 14627)

  • Taylor R. Randall

    (David Eccles School of Business, University of Utah, Salt Lake City, Utah 84112)

Abstract

This paper investigates the effect of using an end-of-period accounting scheme for inventory-related costs when costs actually accrue in continuous time. Using a simple model, we show that (i) the end-of-period scheme results in higher than optimal order-up-to levels and inventory cost if the cost and demand parameters are unchanged, and (ii) it is possible to replicate both the optimal base-stock level and its cost by selecting the values of the cost or demand parameters judiciously. The cost adjustments often require extreme values, and no systematic cost parameter adjustment scheme is robust. However, we find a systematic adjustment to the demand parameters that serves as a good approximation and is robust. We therefore conclude that end-of-period cost accounting without parameter adjustments is in general inappropriate when costs are incurred continuously, but there are adjustments that can make it work well.

Suggested Citation

  • Nils Rudi & Harry Groenevelt & Taylor R. Randall, 2009. "End-of-Period vs. Continuous Accounting of Inventory-Related Costs," Operations Research, INFORMS, vol. 57(6), pages 1360-1366, December.
    • Handle: RePEc:inm:oropre:v:57:y:2009:i:6:p:1360-1366
    DOI: 10.1287/opre.1090.0752
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    References listed on IDEAS

    as
    1. R. Bellman & I. Glicksberg & O. Gross, 1955. "On the Optimal Inventory Equation," Management Science, INFORMS, vol. 2(1), pages 83-104, October.
    2. Uday S. Rao, 2003. "Properties of the Periodic Review (R, T) Inventory Control Policy for Stationary, Stochastic Demand," Manufacturing & Service Operations Management, INFORMS, vol. 5(1), pages 37-53, February.
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    Cited by:

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    2. Taleizadeh, Ata Allah & Tafakkori, Keivan & Thaichon, Park, 2021. "Resilience toward supply disruptions: A stochastic inventory control model with partial backordering under the base stock policy," Journal of Retailing and Consumer Services, Elsevier, vol. 58(C).
    3. Avinadav, Tal & Henig, Mordecai I., 2015. "Exact accounting of inventory costs in stochastic periodic-review models," International Journal of Production Economics, Elsevier, vol. 169(C), pages 89-98.
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