Sixteen. An Opportunity Cost View of Base-Stock Optimality for the Warehouse Problem

  1. Panos Kouvelis2,
  2. Lingxiu Dong2,
  3. Onur Boyabatli3 and
  4. Rong Li3
  1. Nicola Secomandi

Published Online: 11 OCT 2011

DOI: 10.1002/9781118115800.ch16

The Handbook of Integrated Risk Management in Global Supply Chains

The Handbook of Integrated Risk Management in Global Supply Chains

How to Cite

Secomandi, N. (2011) An Opportunity Cost View of Base-Stock Optimality for the Warehouse Problem, in The Handbook of Integrated Risk Management in Global Supply Chains (eds P. Kouvelis, L. Dong, O. Boyabatli and R. Li), John Wiley & Sons, Inc., Hoboken, NJ, USA. doi: 10.1002/9781118115800.ch16

Editor Information

  1. 2

    Olin Business School, Washington University, St. Louis, Missouri, USA

  2. 3

    Lee Kong Chian School of Business, Singapore Management University, Singapore

Author Information

  1. Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania, USA

Publication History

  1. Published Online: 11 OCT 2011
  2. Published Print: 4 NOV 2011

ISBN Information

Print ISBN: 9780470535127

Online ISBN: 9781118115800

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Keywords:

  • base-stock optimality;
  • dynamic programming model;
  • opportunity cost;
  • warehouse problem

Summary

This chapter considers the so called warehouse problem, which is a prototypical problem of the trading activity of a merchant in a commodity market. It is known that the merchant’s optimal trading policy for this problem has a base-stock structure. The chapter provides a simple motivating example that illustrates the base-stock structure of the optimal policy. It presents a formal model of the warehouse problem, and formulates a simplified version of the model presented by Secomandi. This is a finite horizon periodic review dynamic programming model, where inventory trading decisions are made at the beginning of each of a finite number of time periods, each of equal length. The chapter establishes the structure of the optimal policy based on the stated opportunity cost argument. It then discusses some managerial aspects related to this structure.

Controlled Vocabulary Terms

Commodity market; dynamic programming; Opportunity costs; Warehouse problem