A recursion-free functional approximation for the dynamic inventory problem

arXiv2007.08608MaRDI QIDQ6345258FDOQ6345258

Authors: Onur A. Kilic, S. Armagan Tarim 

Publication date: 16 July 2020

Abstract: We consider the dynamic inventory problem with non-stationary demands. It has long been known that non-stationary (s, S) policies are optimal for this problem. However, finding optimal policy parameters remains a computational challenge as it requires solving a large-scale stochastic dynamic program. To address this, we devise a recursion-free approximation for the optimal cost function of the problem. This enables us to compute policy parameters heuristically, without resorting to a stochastic dynamic program. The heuristic is easy-to-understand and -use since it follows by elementary methods of convex minimization and shortest paths, yet it is very effective and outperforms earlier heuristics.

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