Optimal dynamic procurement policies for a storable commodity with Lévy prices and convex holding costs

DOI10.1016/J.EJOR.2015.06.061zbMATH Open1346.90019OpenAlexW2243618914MaRDI QIDQ320103FDOQ320103

Authors Maria B. Chiarolla, Giorgio Ferrari, G. Stabile

Publication date 6 October 2016

Published in European Journal of Operational Research (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1409.0665

zbMATH Keywords

base inventory levelcontinuous time inventoryfirst order conditions for optimalitymonotone follower problemLévy price process

Mathematics Subject Classification ID

Stochastic programming (90C15) Consumer behavior, demand theory (91B42) Inventory, storage, reservoirs (90B05) Optimal stochastic control (93E20)

Abstract: In this paper we study a continuous time stochastic inventory model for a commodity traded in the spot market and whose supply purchase is affected by price and demand uncertainty. A firm aims at meeting a random demand of the commodity at a random time by maximizing total expected profits. We model the firm's optimal procurement problem as a singular stochastic control problem in which controls are nondecreasing processes and represent the cumulative investment made by the firm in the spot market (a so-called stochastic "monotone follower problem"). We assume a general exponential L'evy process for the commodity's spot price, rather than the commonly used geometric Brownian motion, and general convex holding costs. We obtain necessary and sufficient first order conditions for optimality and we provide the optimal procurement policy in terms of a "base inventory" process; that is, a minimal time-dependent desirable inventory level that the firm's manager must reach at any time. In particular, in the case of linear holding costs and exponentially distributed demand, we are also able to obtain the explicit analytic form of the optimal policy and a probabilistic representation of the optimal revenue. The paper is completed by some computer drawings of the optimal inventory when spot prices are given by a geometric Brownian motion and by an exponential jump-diffusion process. In the first case we also make a numerical comparison between the value function and the revenue associated to the classical static "newsvendor" strategy.

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Cited in

(9)

• Optimal spot market inventory strategies in the presence of cost and price risk
• A continuous review inventory model with stochastic prices procured in the spot market
• Pricing policies for selling indivisible storable goods to strategic consumers
• Prescriptive analytics for commodity procurement applications
• Optimal forward contract design for inventory: a value-of-waiting analysis
• The \((S,s)\) policy is an optimal trading strategy in a class of commodity price speculation problems
• Fully discrete schemes for monotone optimal control problems
• Integrated optimization of procurement, processing, and trade of commodities
• On a class of infinite-dimensional singular stochastic control problems

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