Management of a periodic-review inventory system using Bayesian model averaging when new marketing efforts are made

Yun Shin Lee

International Journal of Production Economics, 2014, vol. 158, issue C, 278-289

Abstract: Many companies invest in various marketing efforts, such as price promotion and advertising, in order to attract new customers and build customer loyalty. This paper examines the problem of setting efficient inventory levels when new marketing efforts are made and product demand is autocorrelated. We assume that the inventory manager operates with a base stock policy based on a critical fractile. If marketing has a temporary effect, the underlying demand tends to revert to a long-term equilibrium trend and the inventory manager needs to use a stationary demand model (e.g., autoregressive model) to determine the required inventory level. In contrast, if the effect is permanent, demand shocks contain an element that represents a permanent departure from previous levels and a non-stationary demand model (e.g., random walk) needs to be used instead. We show that the required inventory behaves much differently for the case of using a stationary demand model as opposed to a non-stationary model, but it is difficult in practice to identify a correct demand model in the absence of a long sampling span. In this paper, we propose an inventory model that explicitly acknowledges uncertainty over stationary and non-stationary demand models in response to new marketing efforts. The proposed model averages the inventory policies of the two demand models, weighted by each model׳s posterior probability. This is an extension of Bayesian model averaging. Simulation results demonstrate that the Bayesian model averaging inventory model improves the inventory system.

Keywords: Newsvendor model; Base stock policy; Critical fractile; Autocorrelated demand; Stationary demand; Non-stationary demand; Model uncertainty (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0925527314002746
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:proeco:v:158:y:2014:i:c:p:278-289

DOI: 10.1016/j.ijpe.2014.08.016

Access Statistics for this article

International Journal of Production Economics is currently edited by Stefan Minner

More articles in International Journal of Production Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().