Distributionally Robust Inventory Control When Demand Is a Martingale

DOI10.1287/MOOR.2021.1213MaRDI QIDQ5868962zbMATH OpenOpenAlexFDO

Authors Linwei Xin, David A. Goldberg

Publication date 26 September 2022

Published in Mathematics of Operations Research (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1511.09437

zbMATH Keywords

dynamic programmingmartingaleinventory controldemand forecastingdistributionally robust optimizationrobust Markov decision process

Mathematics Subject Classification ID

Inventory, storage, reservoirs (90B05) Markov and semi-Markov decision processes (90C40) Optimal stochastic control (93E20) Robustness in mathematical programming (90C17)

Abstract: Demand forecasting plays an important role in many inventory control problems. To mitigate the potential harms of model misspecification, various forms of distributionally robust optimization have been applied. Although many of these methodologies suffer from the problem of time-inconsistency, the work of Klabjan et al. established a general time-consistent framework for such problems by connecting to the literature on robust Markov decision processes. Motivated by the fact that many forecasting models exhibit special structure, as well as a desire to understand the impact of positing different dependency structures, in this paper we formulate and solve a time-consistent distributionally robust multi-stage newsvendor model which naturally unifies and robustifies several inventory models with forecasting. In particular, many simple models of demand forecasting have the feature that demand evolves as a martingale. We consider a robust variant of such models, in which the sequence of future demands may be any martingale with given mean and support. Under such a model, past realizations of demand are naturally incorporated into the structure of the uncertainty set going forwards. We explicitly compute the minimax optimal policy (and worst-case distribution) in closed form, by combining ideas from convexity, probability, and dynamic programming. We prove that at optimality the worst-case demand distribution corresponds to the setting in which inventory may become obsolete, a scenario of practical interest. To gain further insight, we prove weak convergence (as the time horizon grows large) to a simple and intuitive process. We also compare to the analogous setting in which demand is independent across periods (analyzed previously by Shapiro), and identify interesting differences between these models, in the spirit of the price of correlations studied by Agrawal et al.

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Cited in

(11)

• Distributionally robust optimization with polynomial robust constraints
• A multistage distributionally robust optimization approach to water allocation under climate uncertainty
• Distributionally robust optimization
• Optimal publishing strategies on a base layer
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