Peeling Layers of an Onion: Inventory Model with Multiple Delivery Modes and Forecast Updates

Abstract

This paper is concerned with a periodic review inventory system with fast and slow delivery modes and regular demand forecast updates. At the beginning of each period, on-hand inventory and demand information are updated. At the same time, decisions on how much to order using fast and slow delivery modes are made. Fast and slow orders are delivered at the end of the current and the next periods, respectively. It is shown that there exists an optimal Markov policy and that it is a modified base-stock policy.

Keywords: forecast revisions, multiple delivery modes, stochastic optimization, base-stock policy, inventory models, Peeling Layers of an Onion, Forecast Updates, dynamic programming

JEL Classification: C61, M11, D83