Confidence Intervals for Data-driven Inventory Policies with Demand Censoring
46 Pages Posted: 4 Sep 2015 Last revised: 8 Nov 2018
Date Written: November 6, 2018
We revisit the classical dynamic inventory management problem of Scarf (1959b) from the perspective of a decision-maker who has n historical selling seasons of data and must make ordering decisions for the upcoming season. We develop a nonparametric estimation procedure for the (S; s) policy that is consistent, then characterize the finite-sample properties of the estimated (S; s) levels by deriving their asymptotic confidence intervals. We also consider having at least some of the past selling seasons of data censored from the absence of backlogging, and show that the intuitive procedure of first correcting for censoring in the demand data yields inconsistent estimates. We then show how to correctly use the censored data to obtain consistent decisions and derive asymptotic confidence intervals for this policy using Stein’s method. We further show the confidence intervals can be used to effectively bound the worst-case difference between the expected total cost of an estimated policy and that of the optimal policy. We validate our results with extensive computations on simulated data. Our results extend to the repeated news vendor problem and the base-stock policy problem by appropriate parameter choices.
Keywords: demand censoring, inventory management, estimation, nonparametric, dynamic programming
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