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

DOI10.1016/J.EJOR.2015.06.061zbMATH Open1346.90019arXiv1409.0665OpenAlexW2243618914MaRDI 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)

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.

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

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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)

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Cited In (6)

• Pricing policies for selling indivisible storable goods to strategic consumers
• Fully discrete schemes for monotone optimal control problems
• 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
• The \((S,s)\) policy is an optimal trading strategy in a class of commodity price speculation problems
• On a Class of Infinite-Dimensional Singular Stochastic Control Problems

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